Freddie Mac loss worsens worries

The gloom over the nation's housing market deepened Wednesday as mortgage-finance giant Freddie Mac reported a gaping quarterly loss and predicted home prices would fall further than previously projected.

The announcement disappointed those hoping the housing market might be bottoming out and heightened worries that the government could be forced to rescue Freddie Mac and the other giant financier, Fannie Mae. The news also signaled mortgage rates are likely to rise further.

In filings with the Securities and Exchange Commission, Freddie Mac said "there is a significant possibility that continued adverse developments" could cause it to fall below government-mandated capital levels.

In an interview, Chief Financial Officer Anthony Piszel said that warning does not imply the company believes that risk is likely or imminent.

Freddie Mac and Fannie Mae, which lubricate the housing market by purchasing mortgages from lenders and touch nearly half the nation's home loans, have been battered by the housing slump.

The downturn has forced millions out of their homes, cost Wall Street hundreds of billions of dollars and helped depress the broader economy.

"Basically, things are still bad," said Steven Persky, chief executive at Dalton Investments, a $1 billion fund in Los Angeles. "Freddie Mac is telling us that nobody really knows how much worse they will get."

The results disappointed analysts who had hoped Freddie Mac might provide enough good news to point a way out of the economic darkness. The company's results contained few rays of light.

Freddie Mac announced $2.8 billion in credit expenses associated with increased housing delinquencies and foreclosure rates, and said the value of mortgage-backed securities it holds declined by $1 billion.

The company lost $821 million during April, May and June, compared with a profit of $729 million during the comparable period a year earlier.

"Home prices declined faster than anticipated in the first half of 2008," Chairman and CEO Richard Syron said during a conference call. Executives believe the housing market is only about halfway through its downward cycle, he said.

"At this point neither we nor anyone else can predict when the national housing market will stop falling," Syron said.

Executives said they expect the firm's losses will increase through at least 2009, and that home prices nationwide will continue to fall as much as an additional 9 percent.

Freddie Mac's stock price fell 19 percent Wednesday to close at $6.49.

Executives said they would shore up Freddie Mac's capital reserves by cutting the firm's quarterly dividend by 80 percent to 5 cents a share, pending board approval. The company also reiterated its commitment to raising at least $5.5 billion from investors.

However, as the stock price has declined, raising those funds has become more expensive. Freddie's entire worth as measured by the stock market was $4.2 billion as of Wednesday afternoon.

"How do you raise $5 billion when the market thinks your entire company is only worth $4 billion?" asked Sean Egan, managing director of Egan-Jones Ratings, an independent credit-ratings firm.

"Investors need to believe good news is around the corner to give a company more money, and Freddie Mac has said there is more bad news to come. We don't think they're going to be able to raise it," Egan said.

Piszel said he believes the company is undervalued and that the current market capitalization will not undermine the firm's ability to raise money.

If Freddie Mac is unable to raise capital, it could spark a political and financial crisis. Last month, Treasury Secretary Henry M. Paulson proposed giving federal officials the ability to pump billions of dollars into Freddie Mac and Fannie Mae by buying shares in the companies. That plan became law in a bill signed by President Bush last week.

Paulson has said he hopes never to use those powers. At the end of June, Freddie Mac held $2.7 billion more than what regulators require.

But if Freddie continues to suffer losses and is unable to raise funds, the company could fall below capital requirements, potentially forcing the government to pour in funds or take control of the firm.

In the call with analysts, executives said their confidence in the ability to raise capital stems from a variety of factors, including improving profit margins and accounting rules that will allow them eventually to reverse some of their current losses.

"We believe we can manage to maintain our capital position for some time," said Piszel.

In Wednesday's earnings release, the company offered extensive data showing how its capital levels would fare under various scenarios.

"We're not going to rush to raise capital because we don't have to," said Piszel. "We have disclosed the range of pain we can take and we think it demonstrates the company is positioning itself to withstand severe stress."