Freddie Mac posts $821M loss

In yet another sign that the nation’s housing market continues to slump, Freddie Mac posted a loss of $821 million for the second quarter, slashed its quarterly dividend 80 percent and promised investors that it would raise at least $5.5 billion in new capital, the financial institution announced Wednesday.
It’s the fourth quarterly loss in a row for the company, a government-sponsored entity that buys mortgages on the secondary market from lenders.

The magnitude of the loss, five times worse than what Freddie reported for the first quarter of 2008, stems primarily from the implosion of the real estate market in Florida and the Southwest during the past two years.

Like its sister organization, Fannie Mae, Freddie is bleeding from the massive number of low-quality subprime mortgages underwritten during the real estate bubble, a large number of which are no longer performing.

Freddie also lost money on its investments in securities backed by subprime mortgages. In the larger world of finance, the collapse of subprime-backed securities has already forced some of the biggest U.S. and European banks to write off more than $200 billion the past year.

In a conference call with investors, CEO Richard Syron warned that the country’s real estate woes were far from finished.

“Today’s challenging economic environment suggests that the housing market is far from stabilizing,” he said. “We are halfway through the overall peak-to-trough decline.”

But critics say Syron has to move faster. Freddie’s stock dropped $1.55, or 19 percent, to $6.49 Wednesday, eroding its capital base. Syron says he doesn’t want to raise more capital now, which would dilute the holdings of current shareholders. “That value’s already gone,” says Paul Miller of FBR Capital Markets. “They need capital, and they need it fast.”

Freddie shares traded at nearly $75 at their peak at the end of 2004 and have tumbled 90 percent from a 52-week high of $67.20 last August.

Freddie’s losses aren’t just a problem for shareholders. Like Fannie, Freddie makes money buying mortgage loans from underwriting banks. In today’s tighter credit market, the current mortgage loans are profitable, but Freddie’s losses are preventing it from investing more capital in the area.

In a conference call Wednesday, Freddie executives said they would hold steady or cut back on the company’s existing loan portfolio, which could make mortgages even more expensive for aspiring homeowners.

The Bush administration and Congress have expressed concern about the health of Fannie and Freddie this summer, noting that problems sustained by those institutions could worsen the economic problems currently facing the nation.

“These guys can’t be turned around until the housing market bottoms out,” says Dan Seiver, finance professor at San Diego State University. “There’s no sign of that happening. If the economy weakens, more homeowners are going to have trouble making payments.”

Greg Farrell • USA TODAY • August 7, 2008

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