Freddie Mac may report a loss of between $1 billion to $5 billion on its subprime AAA portfolio, Credit Suisse said on Monday, sending shares in the second-largest U.S. mortgage finance company sharply lower.
"While Freddie's AAA subprime securities likely have substantial subordination, if the recent credit spread widening does not reverse over the coming quarters, we believe that Freddie could recognize an other-than-temporary impairment of between $1-5 billion," the brokerage said in a research note.
The losses may force Freddie to sell some of its portfolio holdings or raise capital by issuing preferred stock, the note added.
Separately, a brokerage downgraded its recommendation on Freddie's larger mortgage-finance cousin, Fannie Mae.
Friedman, Billings, Ramsey & Co. said it was downgrading Fannie to market perform from outperform and cut its price target on the stock to $35 from $60.
"We now believe the stock will trade close to book value over the next few quarters due to the uncertainty of the impact from the continued deterioration in the housing market and rising credit losses," the brokerage said.