Freddie's Quarterly Loss Widens

Credit-Related Expenses Rise More than 50%

Rising loan delinquencies and falling home prices took an increasing toll on Freddie Mac during the first quarter, but accounting changes obscured the blow.

The giant mortgage funding company, a bellwether of market conditions, reported that it lost $151 million (66 cents per share) in the three-month period ended March 31, compared with a loss of $133 million (35 cents) in the first quarter of 2007.

However, those bottom-line numbers did not reflect the mounting cost of actual and anticipated losses from defaults, foreclosures and the like, known as credit-related expenses.

Freddie Mac reported $1.45 billion of credit-related expenses in the first quarter, up more than half from the previous quarter and more than fivefold from the first three months of last year.

If the company were forced to liquidate its holdings at current prices, it would have been left with a loss, based on a snapshot Freddie Mac provided of its assets and liabilities. The estimated asset value swung to negative $5.2 billion on March 31 from positive $12.6 billion on Dec. 31.

The hole could have been deeper: If not for changes in valuation methods, the March estimate would have sunk by $4.6 billion more.

"[I]t's clear we have not yet hit bottom in the housing market," Richard F. Syron, Freddie Mac's chairman and chief executive, said in a briefing for analysts.

Chartered by the government to keep mortgage money flowing, Freddie Mac packages mortgages into securities for sale to investors, promising to cover the loan payments if the borrowers default. It also buys mortgages. Those functions help lenders get mortgages off their books, freeing funds to make more loans.

When the housing market was booming, many government officials were worried that Freddie Mac and its rival, Fannie Mae, were growing so large that they posed a risk to the financial system, potentially leaving taxpayers on the hook for a federal bailout. Now, the government is counting on the companies to support the market and is allowing them to operate with thinner financial cushions.

Both companies are required to maintain minimum levels of capital as protection against losses. The government raised the requirement after accounting scandals at the two firms but lately has been scaling back the amount as the companies put those troubles behind them.

Freddie Mac said yesterday that it planned to raise $5.5 billion of capital in the near future by selling more common and preferred stock. Issuing more common stock dilutes the value of current investors' shares, and issuing preferred stock saddles the company with additional costs.

The added capital will help Freddie Mac meet the housing market's needs while putting the company on a stronger footing, Chief Financial Officer Anthony S. "Buddy" Piszel said in a news release.