Mortgage giant Freddie Mac scrambles for cash after $2 billion loss

WASHINGTON — Freddie Mac, the nation's No. 2 buyer and guarantor of home loans, lost $2 billion in the third quarter and said today it must raise fresh capital to meet regulatory requirements. Its shares fell 29 percent.

The quarterly loss was the largest ever for Freddie Mac which, like its larger government-sponsored competitor Fannie Mae and a number of large investment banks, has been slammed in recent months by rising defaults on home mortgages.

The mortgage financier said it is "seriously considering" cutting in half its dividend in the fourth quarter and has hired Goldman Sachs and Lehman Brothers as financial advisers to help it examine possible new ways of raising capital in the near future.

Freddie Mac set aside $1.2 billion in the turbulent July-September period to account for bad home loans, which it said reflected "the significant deterioration of mortgage credit."

Freddie Mac, like Fannie Mae, has traditionally funded the mortgage market when other banks pull back because of risk, in keeping with its charter.

Industry experts say a reduced role by either may ripple across the entire housing market.

Fannie Mae and Freddie Mac "have provided essential liquidity in a time of crisis," Fox-Pitt, Kelton analyst Howard Shapiro said in a research note. "Now that that liquidity function has essentially been withdrawn, it will mean, in our opinion, a further exacerbation of the housing downturn — even less credit available and steeper downturns in home prices."

Executives said today there was little to be optimistic about in the upcoming fourth quarter and told investors to brace for more of the same, sending shares on the greatest one-day plunge since public trading began for Freddie nearly two decades ago.

The stock today closed down $10.76 at $26.74.

"This is a very, very difficult time. This is not happy news," Freddie Mac's chairman and CEO, Richard Syron, said in a conference call with Wall Street analysts. "We will work through this."

If dividend cuts and other actions aren't sufficient to help the company reach its government-mandated level of capital held in reserve as a cushion against risk, Freddie Mac said it may consider other measures such as limiting its growth, reducing the size of its mortgage investment holdings or issuing new stock.

Freddie's third-quarter loss was almost triple the $715 million deficit during the same period last year. And because of accounting adjustments, it reported negative revenue of $678 million, compared with positive revenue of $91 million a year earlier.

The $2 billion third-quarter loss for Freddie Mac worked out to $3.29 a share, compared with $1.17 a share in the third quarter of 2006. Losses far exceeded Wall Street analysts expectations of a 22 cent per-share deficit, projected in a poll by Thomson Financial.

The results for Freddie Mac, together with a recent report by Fannie Mae, heighten investor anxiety over the government-sponsored companies, which had been considered less vulnerable in the housing crisis because they have had less exposure to high-risk, subprime mortgages.

Freddie Mac's regulatory core capital was estimated to be just $600 million in excess of the 30 percent mandatory target capital surplus directed by the Office of Federal Housing Enterprise Oversight.

So far this year, Freddie Mac has recognized $4.6 billion in pretax credit related items.

Buddy Piszel, chief financial officer, said Freddie Mac is moving to stem losses.

"We have begun raising prices, tightened our credit standards and enhanced our risk management practices," Piszel said. "We also continue to improve our internal controls."

"We were getting thin" in terms of excess capital, and Freddie Mac decided it needed to bolster its capital "to manage through this credit cycle," Piszel said in a telephone interview. That cycle isn't expected to improve until 2009, he said, with home prices projected to register a 5 percent to 6 percent decline nationwide.