Freddie Mac, the U.S. mortgage finance company that stunned Wall Street with a $2 billion quarterly loss a week ago, plans to sell $5 billion of preferred stock in a deal to be launched as early as this week, the Wall Street Journal said.
The company had said that it planned to raise capital in a "large transaction" in the very near term, while several analysts had said it would need to raise at least $5 billion.
Freddie Mac , the No. 2 housing finance company, was reluctantly planning to issue new preferred stock to raise capital for money-making investments that would benefit all shareholders, executives said after the company's dismal results on Tuesday.
A company spokesman declined to comment on any capital-raising plans.
Freddie Mac has typically used revenue from preferred stock sales to increase the size of its profitable, $703 billion portfolio of mortgages. Holders of preferred stock typically take priority when dividends are paid out, even if they do not have voting rights.
But in recent months, both Freddie Mac and Fannie Mae, its larger cousin, have had to curtail the growth of their investment holdings because they have not had enough capital reserves to insure against possible losses.
Under orders from their regulator and in the wake of accounting scandals at both companies, Fannie Mae and Freddie Mac have been holding billions of dollars in extra capital since 2004.
Currently Freddie has just $600 million more than the required minimum capital required by its regulator, the Office of Federal Housing Enterprise Oversight.
To make matters worse, in a research note on Monday, Credit Suisse said Freddie Mac may see a loss of between $1 billion to $5 billion on its subprime "AAA" portfolio.
Until recently, such highly rated bonds were thought to be shielded from woes in the mortgage market for subprime loans.
Freddie's finance chief Buddy Piszel told the Wall Street Journal a writedown was not needed and that more than half of the mortgage borrowers whose loans are included in the bonds would have to default before Freddie saw any losses.
Yet Freddie Mac's credit losses may surpass its historic high, if the U.S. mortgage market deteriorates more than what is forecast by the No. 2 mortgage finance company, Moody's Investors Service said in a statement dated Thursday.
Such a spike in credit losses could result in Moody's downgrading the ratings on Freddie Mac's bank financial strength, subordinated debt and preferred stock ratings, the debt rating agency said.
Freddie Mac expects credit losses stemming from its subprime mortgage exposure to rise through at least 2009, equaling 11 basis points of its credit guarantee portfolio, which was the historic high in credit losses for the GSE, Moody's said.