Mortgage-finance company Freddie Mac on Tuesday said it would send a $2.3 billion dividend payment to the U.S. Treasury, after posting a sharp profit increase in its latest quarter.

Freddie reported a third-quarter profit of $2.33 billion, compared with a prior-year loss of $475 million and a June-quarter profit of $993 million.

The latest quarter included a $700 million gain from tightening credit spreads. Last year's quarter was hit by $4.17 billion loss from derivatives, which Freddie uses to hedge interest-rate risk. This quarter the derivatives loss was $36 million.

The company took a $113 million provision for credit losses, compared with a benefit of $528million in the same quarter last year.

Net interest income fell 2.6% to $3.65 billion.

Amid improvement in the housing market, Freddie saw its serious delinquency rate continue to improve, reaching 1.02%, the lowest level since 2008. The company sold $0.6 billion seriously delinquent single-family loans during the quarter, the same as last year, in order to mitigate losses and reduce holdings of less-liquid assets.

"Volumes were higher, credit quality is at its best in eight years, and legacy assets are continuing to decline," Chief Executive Donald Layton said.

Freddie and mortgage-finance firm Fannie Mae were put into a so-called conservatorship under government control during the 2008 financial crisis.

Because its net worth of $3.5 billion was more than its capital buffer of $1.2 billion, Freddie will send a $2.3 billion dividend to the Treasury for the quarter. It also didn't need a capital infusion because total equity remained positive, increasing to $3.51 billion from $1.3 billion last year.

Under the terms of the bailout, the companies must send nearly all of their profits to the government in the form of dividends and wind down their capital buffers over time. Its capital buffer is scheduled to decline to $600 million in 2017 and zero in 2018.

In all, after the quarter's dividend, the company will have sent $101.4 billion to the Treasury, compared with the $71.3 billion infusion it has received.

Freddie and Fannie have recently been caught between shareholders, civil-rights groups and some small lenders who want to see them freed from government control, a White House that believes the current system is broken, and a Congress that can't come to agreement on what the future system should be.

The price of Freddie's portfolio, as with that of all bonds, rises and falls as interest rates change. The company uses derivatives in an effort to counteract that effect, but because of accounting rules, the derivatives can make large profits or losses appear over short periods.

Over the long term, the impact of the derivatives accounting issue is negligible. But as the capital buffer disappears, the accounting issue could cause Freddie to require an injection of capital from the Treasury.

Fannie and Freddie don't make loans. Instead they buy them from lenders, wrap them into securities and provide guarantees to make investors whole if the loans default.

Freddie said it helped 650,000 families to own or rent a home through refinancing and borrowing, up from 598,000 last year.

Write to Austen Hufford at austen.hufford@wsj.com

(END) Dow Jones Newswires

November 01, 2016 09:55 ET (13:55 GMT)

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