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Freddie Mac Sued Over Mortgage Problems

A shareholder sued Freddie Mac, its chief executive and others on Wednesday, alleging the No. 2 U.S. home funding company did not take adequate steps to protect itself from problems in the mortgage industry.

Scott Reimer, a shareholder, said in the complaint filed in U.S. District Court in Manhattan that Freddie Mac, Chief Executive Richard Syron and some other executives did not adequately implement risk control measures to protect the company from acquiring billions of dollars worth of mortgages with poor underwriting standards.

"Moreover, the company's procedures for appraisals led to many inflated appraisals, increasing the risk of defaults," it said. "Ultimately, the company has reported billions of dollars in losses, has been mentioned in investigations by the New York attorney general and announced it must raise new capital to meet regulatory requirements."

The suit, which asks for class action status, seeks to represents purchasers of Freddie Mac shares between August 1, 2006 and November 19, 2007.

Freddie Mac said it did not comment on matters of litigation. But it added that "accurate appraisals are fundamental to our effective credit risk management, as well as to the long-term success of the home buyers we are chartered to serve."

"Freddie Mac has no incentive to accept inflated appraisals on the loans we purchase and guarantee," it said in an e-mailed statement. "Indeed, Freddie Mac has a long-standing commitment to fighting mortgage fraud."

Government-sponsored enterprises Fannie Mae, the largest U.S. home funding company, and Freddie Mac have been hit by mounting losses as home foreclosures continue to rise and the credit crisis drains the value of mortgages they own.

On Tuesday, Freddie Mac reported a $2 billion net loss for the third quarter and said it might slash dividends by 50 percent or use other means to boost its capital as the downturn in the housing market worsens.

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