US Mortgage Meltdown Accelerates

This is a very bad omen:

Freddie Mac shares tumble 26%

MARCY GORDON

The Associated Press

November 20, 2007 at 11:24 AM EST

WASHINGTON — Freddie Mac, the No. 2 buyer and guarantor of home loans in the U.S., lost $2-billion (U.S.) in the third quarter and said Tuesday it must raise fresh capital to meet regulatory requirements. Its shares fell more than 26 per cent in early trading Tuesday.

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 Group Inc. and Lehman Brothers Holdings Inc. as financial advisers to help it examine possible new ways of raising capital in the near future.

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

Executives said Tuesday there was little to be optimistic about in the 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.

Losses widened from $715-million during the same period last year. The report sent shares tumbling $9.89 to $26.37 Tuesday.

The company posted negative revenue of $678-million, as it sustained losses under generally accepted accounting principles of $3.6-billion in the quarter. The revenue compared with positive revenue of $91-million a year earlier.

The $2-billion third-quarter loss for McLean, Va.-based 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 loss, according to 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 per cent mandatory target capital surplus directed by the Office of Federal Housing Enterprise Oversight.

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.

That could put additional strain on a housing market suffering the worst slump in more than 15 years.

Freddie Mac has traditionally funded the mortgage market when other banks pull back because of risk.

An inability by Freddie Mac to fill that role could hinder a return to equilibrium in the mortgage market and possibly intensify the housing downturn.

“Without doubt, 2007 has been an extremely difficult year for the country's housing and credit markets and, as our third-quarter financial results reflect, we have been impacted by the deterioration in these markets,” company Chairman and CEO Richard Syron said in a statement. “We recognized the challenges facing the mortgage markets, however, and have taken further steps to address them.”

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,” Mr. 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,” Mr. 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 per cent to 6 per cent decline nationwide.