Freddie to Cut Dividend, Sell Stock to Aid Reserves

By Thomas Heath
Washington Post Staff Writer
Wednesday, November 28, 2007

Freddie Mac yesterday announced plans to shore up its reserves against bad mortgage loans, saying it would sell $6 billion in new stock and cut its $2 annual dividend in half.

The McLean mortgage-finance company said the actions would help it meet government requirements for its capital holdings after it reported a $2 billion loss in the third quarter.

Richard F. Syron, Freddie Mac's chairman and chief executive, said in a statement that the moves "provide sufficient capital to continue fulfilling our important housing mission through the current market environment, and better position us to effectively manage the company going forward."

Freddie Mac shares closed at $25.73 yesterday, up more than 5 percent. The stock is down more than 60 percent from its 52-week high. Its larger rival, Fannie Mae, closed at $29.40, up nearly 2 percent for the day.

The new offering will take the form of preferred stock, putting its shareholders first in line for any dividends. Freddie Mac executives said they wanted to sell preferred stock so the value of common stock would not be diluted. The vast majority of the $6 billion in new preferred shares is not eligible to be converted into common stock.

The dividend cut will take effect in the fourth quarter, with a reduction to 25 cents a share.

Freddie Mac spokesman David R. Palombi said the company's executives and its investment bankers, Lehman Brothers and Goldman Sachs, would meet with investors in coming days to gauge interest in the offering.

"We look forward to getting in front of investors and outlining the company's short- and long-term strategies," Palombi said.

John Delaney, chief executive of CapitalSource of Chevy Chase, said Freddie Mac should not have any difficulty finding buyers.

"Fannie and Freddie are unique franchises with great management teams that can generate high returns on capital," he said. "I would expect there to be significant demand for their equity securities."

Freddie Mac's regulator, the Office of Federal Housing Enterprise Oversight, requires it to maintain a capital surplus 30 percent more than it is legally required to hold. Freddie Mac's core capital at the end of the third quarter was about $34.6 billion, barely $600 million above the minimum required by OFHEO.

The company has had a hectic month. New York Attorney General Andrew M. Cuomo issued subpoenas to Freddie Mac and Fannie Mae, seeking information on how they evaluated mortgage appraisals on loans they bought from banks.

Freddie Mac said it would cooperate with Cuomo's office and agreed to appoint an independent examiner to review appraisals.

Last week, a law firm filed suit in a Manhattan federal court on behalf of investors accusing the company of making false statements concerning its risk management and the protections it put in place to guard against problems in the mortgage industry.

Freddie Mac and Fannie Mae were chartered by the federal government to keep money flowing to mortgage lenders. They do so by buying mortgages from other lenders, which allows those lenders to originate additional loans. They also guarantee pools of loans, which are then sold to investors as securities. Their roles have been curtailed in recent months as their losses from bad loans grew and they were forced to write down the assets in their portfolios.

Freddie Mac's executives have said the firm's losses from bad mortgages amount to $4.5 billion and could eventually exceed $10 billion. Freddie Mac and Fannie Mae had a hand in more than 60 percent of all mortgages originated in the most recent quarter.

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