Freddie Mac Also Stung by the Housing and Mortgage Problems

After the bad news from Fannie Mae last week, now it is Freddie Mac’s turn and the news is not good. Text in bold is my emphasis. From Bloomberg:

Freddie Mac, the second-largest source of money for U.S. home loans, said its third-quarter loss almost tripled as rising home foreclosures sliced the value of its mortgage holdings.

The net loss widened to $2.02 billion, or $3.29 a share, from $715 million, or $1.17 a share, a year earlier, the McLean, Virginia-based company said today in a statement. The company said it may cut its dividend in half and has hired Goldman Sachs Group Inc. and Lehman Brothers Holdings Inc. to help it raise capital.

Freddie Mac, which owns or guarantees one in five home loans, increased provisions for bad mortgages as foreclosures doubled in August to the highest on record. Fannie Mae, the largest buyer of mortgages, reported on Nov. 9 its loss more than doubled and said home prices will keep falling. Concern that the companies' credit losses will rise further sent the stocks tumbling in the past four trading days to the lowest in a decade.

``Nothing is going to improve until after the first half,'' said Stuart Plesser, a Standard & Poor's equity analyst in New York. Freddie Mac's ``charge off levels are going to be going up.''

Fannie Mae and Freddie Mac own or guarantee about 40 percent of the $11.5 trillion U.S. home loan market. Congress created the companies to increase mortgage financing by buying loans from lenders. They profit by holding mortgages and mortgage bonds as investments and by charging a fee to guarantee and package loans as securities. They see losses when defaults rise.

Foreclosure filings doubled to 223,538 in September from a year earlier as subprime borrowers struggled to make payments on adjustable-rate mortgages, RealtyTrac Inc. said last month.
Banks and securities firms worldwide have already reported about $50 billion in losses from subprime mortgages, loans given to borrowers with weak credit that have been defaulting at a record pace. The total damage may reach $400 billion, Deutsche Bank analysts said last week.

Fannie Mae's third-quarter net loss more than doubled to $1.39 billion because of mortgage delinquencies. The loss was caused by a $2.24 billion decline in the value of derivative contracts and $1.2 billion in credit losses among the $2.7 trillion of mortgage assets Fannie Mae owns or guarantees.

Freddie Mac on Aug. 30 reported that its second-quarter profit fell 45 percent as it set aside $320 million for credit losses. Chief Financial Officer Anthony Piszel at the time predicted the drag on profits from defaults would rise in 2008.

Fannie Mae and Freddie Mac have been constrained from buying mortgages because of restrictions imposed last year. Ofheo in September loosened limits on the government-chartered companies' holdings, in an effort to ease a housing slump that's caused other mortgage investors to retreat.