Wednesday, May 14, 2008

Freddie Mac Posts $151 Million Loss

Freddie Mac Posts Third Straight Loss, Will Raise $5.5 Billion

By Dawn Kopecki

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Freddie Mac, the second-largest U.S. mortgage-finance company, posted a $151 million first-quarter loss as tumbling home prices and record foreclosures drove up credit costs. The company will raise $5.5 billion in capital.

The net loss amounted to 66 cents a share, and compares with the 84 cent average estimate of 11 analysts surveyed by Bloomberg. Fannie Mae, Freddie Mac's bigger competitor, last week posted a larger-than-expected $2.19 billion loss for the quarter and raised $6 billion.

Freddie Mac, based in McLean, Virginia, and Fannie Mae agreed to raise capital to overcome losses from IND' ))">loan delinquencies. Those losses and other impairments will likely deepen, according to analysts including Christopher Whalen, a managing director at Institutional Risk Analytics. Chief Executive Officer Richard Syron said in March he won't raise capital at the expense of shareholders.

‘‘People need to accept the fact that the rest of the year for the enterprises and the rest of the mortgage market are going to be really ugly,'' said Whalen, who helped co-found Torrance, California-based Institutional Risk Analytics.

Fannie Mae and Freddie Mac, both government sponsored enterprises, own or guarantee almost half of the $12 trillion in U.S. residential mortgages outstanding. The worst IND' ))">housing market since the Great Depression, caused Freddie Mac's fair value of assets to decline. Fannie Mae's assets dropped fell to $12.2 billion from $35.8 billion in the period.

‘‘The credit losses for both GSEs will ramp up over the next few quarters and they will have to raise capital again,'' said Ajay Rajadhyaksha, the head of fixed-income strategy at Barclays Capital.

Credit Losses

Freddie Mac has said its credit losses would rise to the equivalent of 12 basis points, or $2.2 billion, in 2008 and 14 basis points, or $2.9 billion, next year, less then some analyst estimates. Fannie Mae last week boosted its estimates for this year to a range of 13 to 17 basis points.

Credit Suisse analyst Moshe Orenbuch in New York expects Freddie Mac's credit losses to rise to 20 basis points this year and 29 basis points in 2009. Fannie Mae's losses will grow to 21 basis points in 2008 and 24 basis points next year, he said.

The first-quarter net loss is Freddie Mac's fourth in the past six quarters. Freddie Mac reported a net loss of $211 million, or 46 cents a share, in the year-earlier period.

Most of Freddie Mac's record $2.45 billion fourth-quarter loss stemmed from a surge in costs to cover foreclosures and losses on derivatives used to hedge its credit and interest-rate risk. The company's costs to cover credit losses and other related expenses soared to $3.46 billion in that quarter, while losses on its derivatives portfolio mushroomed to $2.09 billion.

Accounting Issues

Freddie Mac has plunged about 63 percent in the past year in New York Stock Exchange composite trading. The stock declined 94 cents to $24.96 yesterday. Fannie Mae fell 13 cents to $28.12 and has dropped 55 percent in the past 12 months.

Fannie Mae and Freddie Mac were created by Congress to increase mortgage financing and provide market stability. They make money by holding mortgage assets that yield more than their debt costs, and by guaranteeing bonds they create out of loans.

Fannie Mae and Freddie Mac since 1970 have been exempt from registering their stock and debt securities because of their government-chartered status. The companies bowed to congressional pressure in 2002 and agreed to register stock, plans that stalled when auditors uncovered what would amount to $11.3 billion in accounting errors and forced an overhaul of internal controls.

Freddie Mac began the process of registering again in March and has said it expects to finish by mid-year. The first-quarter loss is the company's fourth in the past six quarters. Freddie Mac reported a net loss of $211 million, or 46 cents a share, in the year-earlier period.

Capital Raising

Fannie Mae Chief Executive Officer Daniel Mudd, 49, and Freddie Mac's Syron, 64, agreed in March to raise capital after Ofheo, allowed the companies to add more assets in an effort to pump cash into the housing market and promote lending. Ofheo Director James Lockhart said yesterday that Ofheo will continue easing the companies' capital restrictions as they raise more reserves.

Financial firms have raised more than $246 billion as losses and writedowns at the world's biggest banks exceed $335 billion. Analysts surveyed by Bloomberg said Freddie Mac will have to raise as much as $15 billion in capital to keep investors happy.

Fannie Mae, which sold $7 billion in preferred shares in December, yesterday raised $2 billion of perpetual preferred stock to further help replenish capital lost in credit and derivative writedowns. Since reporting its third straight quarterly loss on May 6, the company has also sold $2.25 billion of common stock and $2.25 billion of convertible preferred stock.

New Business

Their special government-linked status has driven most of the new mortgage business for conforming loans, which are under $417,000, to Fannie Mae and Freddie Mac in the past year. The two companies were responsible for 81 percent of mortgage securities issued in the fourth quarter, up from 42 percent the year before.

Ofheo lifted limits on the size of Fannie Mae's and Freddie Mac's investment portfolios this year, ending more than two years of restrictions. Ofheo's Lockhart said at the time the companies are needed to bolster the mortgage market. Ofheo in March eased the surplus requirement to 20 percent from 30 percent for both companies. Last week it cut Fannie Mae's requirement down to 15 percent after the Washington-based company announced plans to raise capital.

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