Freddie Mac asks U.S. for $10 billion as losses pile up
Thursday, May 6, 2010
Freddie Mac, the bailed-out mortgage-finance giant, reported Wednesday that it continues to lose money and needs an additional $10.6 billion in assistance from U.S. taxpayers.
The most recent earnings report follows three straight quarters in which the McLean-based company did not need infusions from the Treasury. Still, the firm is struggling to recover from the mortgage-market meltdown; it reported a net loss of $6.7 billion in the first quarter of 2010, compared with a loss of $9.9 billion a year ago.
Freddie Mac is turning to the Treasury again mostly because of a change in accounting. Revised rules that took effect this year require companies such as Freddie to move all mortgages they guarantee -- but don't own -- onto their books. This shift alone caused the company's equity to drop by $11.7 billion, helping to plunge its net worth into the red.
Under the terms of Freddie's September 2008 bailout, taxpayers make up the shortfall in any quarter when the firm's net worth is negative. The accounting change, along with the firm's loss and a $1.3 billion dividend payment to the Treasury, pushed Freddie's net worth to a negative $10.5 billion, down from a positive $4.4 billion last year.
Freddie's quarterly report triggered renewed calls from some lawmakers to reform the company and its larger sister, District-based Fannie Mae. These government-sponsored enterprises, or GSEs, contributed to the financial crisis but are not addressed in the regulatory overhaul legislation now before the Senate.
"Without real GSE reform, the bailout of Fannie and Freddie will not stop, taxpayers will be forced to continue to dump hundreds of billions of dollars into the companies, and Fannie and Freddie will continue business as usual," said Rep. Spencer Bachus (Ala.), ranking Republican on the House Financial Services Committee, in a statement released after Freddie's earnings. Obama administration officials have said reform on that issue is more likely to come next year.
Even though the accounting change explains most of the company's negative net worth, Freddie is still a long way from independence, and a new infusion of Treasury funds could put the company deeper in the hole.
"It's significant because it does draw from the taxpayer, and the more taxpayer funds in Fannie and Freddie, the harder it will be ultimately to bring them out of conservatorship," said Karen Shaw Petrou, managing partner of Federal Financial Analytics, a research firm in Washington.
Since taking over Freddie, the government has provided $50.7 billion in help to the company. This new request for funds from the Federal Housing Finance Agency, which regulates Freddie and Fannie, would push that total to $61.3 billion.
The Congressional Budget Office estimates that the total drain on taxpayers from bailing out Freddie Mac and Fannie Mae will be $389 billion through 2019.
In its report, Freddie acknowledges "significant uncertainty" as to whether it will ever wean itself off government support.
Much depends on whether the housing market can make a full recovery and on the performance of the government's loan-modification programs. "We're basically bumping along at the bottom and it'll take some time for things to settle down," said Mahesh Swaminathan, a senior mortgage analyst at Credit Suisse.