Freddie Mac has Largest Loss Ever, Needs Money
|November 21, 2007|
WASHINGTON (AP) — The mortgage crisis intensified Tuesday as Freddie Mac, the nation's No. 2 buyer and guarantor of home loans, posted its largest quarterly loss ever and warned that it may need to curtail its business unless it can raise fresh capital.
Freddie Mac lost $2 billion in the third quarter, much more than Wall Street was expecting, primarily because it needed to set aside $1.2 billion to account for bad home loans. Freddie Mac also said it may slice in half its quarterly dividend of 50 cents per share — which would be its first dividend cut since becoming a public company in 1989.
That double dose of bad news sent Freddie Mac's shares skidding 28.7 percent, the largest decline in the two decades its shares have traded in public markets.
It also sent a shudder through the mortgage market since Freddie's loss was even larger than the $1.4 billion quarterly deficit of Fannie Mae, its bigger government-sponsored competitor.
Analysts noted that Freddie Mac's holdings of securities backed by high-risk subprime mortgages — the loans targeted to borrowers with tarnished credit records that succumbed to a wave of defaults starting earlier this year — greatly exceed those of Fannie Mae.
The remedies Freddie Mac is contemplating could add to the strain on the slumping housing market, analysts say, an outcome that would be sharply at odds with its government-mandated mission to keep money flowing to lenders.
Fannie Mae and Freddie Mac have traditionally been a key source of funding for banks and other mortgage lenders by purchasing mortgages they originate and then packaging them for sale to investors. Industry experts say a reduced role by either could ripple across the entire housing market.
The two "have provided essential liquidity in a time of crisis," Fox-Pitt, Kelton analyst Howard Shapiro said in a research note Tuesday. "Now that that liquidity function has essentially been withdrawn, it will mean, in our opinion, a further exacerbation of the housing downturn — even less credit available and steeper downturns in home prices."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 of McLean, Va.-based Freddie Mac said Tuesday there was little to be optimistic about in the current quarter and told investors to brace for more of the same.
"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."
Freddie Mac said it is "seriously considering" cutting in half its dividend in the fourth quarter and has hired Goldman Sachs Group Inc. and Lehman Bros. Holdings Inc. as financial advisers to help it examine possible new ways of raising capital.
If dividend cuts and other actions aren't sufficient to keep the company's capital levels above government-mandated minimums, 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.
The company likely will raise capital by selling several billion dollars of preferred stock in the "very near term," the company's chief financial officer, Buddy Piszel, told The Wall Street Journal Tuesday. Analysts said that could amount to $5 billion to $10 billion.
Copyright 2007 Associated Press