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Freddie's Quarterly Loss Widens

Richard Syron said housing has
Richard Syron said housing has "not yet hit the bottom." (Stephan Savoia - AP)
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Holding onto the capital would give Freddie Mac a bigger safety margin. Alternatively, using the capital would enable Freddie Mac to buy or guarantee more mortgages but could leave it more exposed to a further downturn.

Freddie Mac fell below its required capital level late last year before raising $6 billion from investors.

The McLean company promised in March to raise more capital as part of a deal with its regulator, the Office of Federal Housing Enterprise Oversight. That deal allowed Freddie Mac and Fannie Mae to operate with smaller cushions. Freddie Mac has not fulfilled that pledge; Fannie Mae recently raised $5.05 billion through stock offerings.

Freddie Mac's plan to raise $5.5 billion apparently would count toward the March promise and earn the company another cut in its capital requirement.

Freddie Mac said the regulator plans to reduce its capital requirement a second time when the company completes the coming stock offerings and a third time when it fulfills other long-standing commitments, such as separating the roles of chairman and chief executive.

The financial report that Freddie Mac issued yesterday was another in a long series of reports from financial services companies showing the continued fallout from the crisis in the housing market.

"The credit deterioration has been largely driven by a decline in home prices and other declines in regional economic conditions as well as increasing volumes of non-traditional mortgage loans and less stringent underwriting standards in the last three years," the company said.

The company's financial results are heavily influenced by subjective estimates, which the turmoil in the housing market has made increasingly difficult. The company demonstrated the fallibility of such estimates when it revised one of its major predictions.

Like Fannie Mae, which last week reported a first-quarter loss of $2.2 billion, Freddie Mac said it is now forecasting bigger credit losses than it previously predicted. Measured as a fraction of Freddie Mac's total mortgage guarantees, the new estimate calls for credit losses this year to be 33.3 percent larger.

The bottom-line losses Freddie Mac has reported do not include $32.4 billion of decreases in the value of mortgage-related securities the company still holds. Those "unrealized" losses more than doubled since Dec. 31.

The company said it has not counted the unrealized losses against earnings because it expects the investments to recover.

Freddie Mac's first-quarter results benefited from a $1.3 billion expense reduction related to a change in the way it accounts for its loan guarantees under a new accounting rule.

The results also benefited from a change in the way the company manages loan guarantees. Formerly, the company bought loans from investors after they were delinquent for 120 days. Now, the company may delay that step for up to two years.

Freddie Mac said its losses from such loan purchases were $51 million in the first quarter, down from $736 million the previous quarter.

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