Freddie Mac Reports More Losses From Bad Loans
Thursday, August 7, 2008
Freddie Mac, a troubled giant of the mortgage market, yesterday reported that its losses from foreclosures and other failed home loans nearly doubled during the second quarter, and it predicted that home prices would fall more than it previously projected, compounding its woes.
Days after the government put in place a federal lifeline for the company, Freddie Mac said its expenses from foreclosures and related problems rose to $2.8 billion in the quarter ended June 30 from $1.4 billion during the previous three months.
From the end of March to the end of June, the company more than doubled its reserves for anticipated losses to reflect continuing increases in mortgage delinquencies and the rising cost of disposing of foreclosed property. Falling home prices reduce the amount that Freddie Mac can recover and make it likely that even more homeowners will default.
Freddie Mac chief executive Richard F. Syron predicted that peak-to-trough declines in national home prices will average 18 to 20 percent, more than the 15 percent the company had forecast. "We now think that we're about halfway through the overall peak-to-trough decline," Syron said during a phone briefing for investors and analysts.
Overall, the McLean company lost $821 million ($1.63 per share) in the second quarter, compared with a loss of $151 million (66 cents) in the quarter ended March 31. For the second quarter of 2007, Freddie Mac reported a profit of $729 million.
Freddie Mac's stock tumbled on the earnings report, losing 19.3 percent, to close at $6.49. That was above its recent low of $3.89 but 90.3 percent off its 52-week high of $67.20.
A meltdown of investor confidence in Freddie Mac and its rival Fannie Mae last month prompted Congress and the Bush administration to lay the groundwork for a potential taxpayer bailout of the companies. The rescue legislation President Bush signed last week allows the Treasury to extend unlimited amounts of money to the companies through loans and stock purchases.
The financial erosion Freddie Mac disclosed yesterday will "if anything increase the likelihood of a government-led capital infusion," said analyst Frederick Cannon of the investment firm Keefe, Bruyette & Woods.
But Syron said he didn't expect Freddie Mac to resort to government assistance.
The extent of the company's weakness was underscored by a separate figure released yesterday. If Freddie Mac had to liquidate its holdings based on market values as of June 30, it would have been left with a shortfall of $5.6 billion, the company reported. That compared with a deficit of $5.2 billion three months earlier -- and a surplus of $31.9 billion as of mid-2007.
Freddie Mac and Fannie Mae funnel money from the financial markets to lenders so they can issue more mortgages. The companies buy loans from lenders. They also pool loans into securities for sale to other investors, promising to make the investors whole if the borrowers default.