Freddie Mac Reports Further Losses for Q2

By David S. Hilzenrath
Washington Post Staff Writer
Wednesday, August 6, 2008; 6:53 AM

Freddie Mac, troubled giant of the mortgage market, today reported continued deterioration of its finances, days after the government put in place a potential federal lifeline for the company.

Freddie said today that its losses from foreclosures and other loan-related problems nearly doubled during the second quarter, to $2.8 billion from $2.5 billion during the previous three-month period. The increase was even steeper compared to the second quarter of last year, when those expenses totaled only $463 million.

Over the same period, the company more than doubled its reserves for anticipated losses to reflect continuing increases in mortgage delinquency rates and rising costs of disposing of foreclosed property.

If it 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 in mid-2007.

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 days ago allows the Treasury to extend unlimited amounts of money to the companies through loans or stock purchases.

Freddie Mac said today that, by regulatory standards, it already has an ample financial cushion. The company said its capital exceeded the government requirement by $2.7 billion, down sharply from the $6 billion estimate it gave three months earlier.

However, investors have grown increasingly skeptical of the regulatory standard and look to other measures of the company's condition, such as how deep the hole would be if the company had to liquidate assets and liabilities at current market values.

To stay in compliance with the regulatory capital requirement, the company said it plans to reduce the dividend on its common stock in the third quarter from 25 cents to 5 cents or less per share.

Overall, the McLean company lost $821 million ($1.63 per share) in the second quarter, compared with a loss of $155 million (66 cents) in the quarter that ended March 31.

Freddie Mac is both a major source of support for the troubled housing market and one of its chief casualties. The company has been incurring heavy losses as defaults and foreclosures have risen and home prices have fallen.

The government adopted the rescue plan because it fears that a collapse of either company could severely damage the economy and the international financial system.

Freddie Mac operates much like a wholesaler for mortgage money, funneling money from the financial markets to lenders so they can make more loans. The company borrows money from investors to buy loans from lenders. It also pools loans into securities for sale to investors, promising to make the investors whole if the borrowers default.

Though owned by shareholders and traded on the New York Stock Exchange, the company operates under a federal charter that gives it an advantage in the business arena. The perception that the government stands behind the company has helped it fund its investments with money borrowed at low rates.

Like Fannie Mae, Freddie Mac promised the government early this year that it would raise additional capital to put itself on a more secure footing and enable it to provide greater support to the troubled housing market. That promise was made in exchange for relief from a regulatory constraint. Unlike Fannie Mae, Freddie Mac has yet to follow through.

Both companies have been reluctant to raise capital because doing so can cut into profits and water down the value of current shareholders' stock.

Fear of such dilution, combined with news that the government was considering plans to put the companies under federal control if their condition got bad enough, contributed to the panicked selloff in the two companies' shares last month. Freddie Mac's stock closed yesterday at $8.04, above its recent low of $3.89 but still way off its 52-week high of $67.20.

Freddie Mac executives were planning to brief investors on the quarterly results by conference call this morning.

Fannie Mae is scheduled to release its second quarter results Friday.

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