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Freddie Mac Shares Rise; Loss Smaller than Expected

Reuters
Wednesday, 14 May 2008 | 10:42 AM ET

Freddie Mac, posted a smaller-than-expected quarterly loss on Wednesday and the second-biggest home-financing company said it would raise capital as credit losses deepened.

Its shares rose more than 9 percent.

Freddie Mac benefited from reduced losses on credit guarantees as a result of an accounting change which limited its first-quarter net loss.

Investors welcomed news that the company will raise more capital, which will allow it expand its business, and comments that it doesn't expect to cut its dividend further.

The McLean, Virginia-based company said its net loss widened to $151 million, or 66 cents per share, from $133 million, or 35 cents per share loss in the same period a year earlier. It is coming off a record $2.5 billion loss in the fourth quarter.

"It wasn't worse than expected and raising capital is a good thing" for growth, said Malcolm Polley, chief investment officer at Stewart Capital Advisors in Indiana, Pennsylvania. "It means Freddie's business will be able to expand and it will be used to put some sort of backstop to this mess we are in."

Wall Street analysts expected Freddie Mac to post a net loss of $1.57 per share in the first quarter, according to Reuters Estimates.

While it benefited from accounting rules, overall credit-related expenses still jumped to $1.45 billion in the quarter from $262 million a year earlier.

"Market and credit conditions remained challenging during the first quarter of 2008," Freddie Mac Chief Executive Officer Richard Syron said in a statement. The company had a better quarter than in the previous two that were "significantly impacted by credit and interest-related marks," he said.

Freddie Mac shares surged 9.4 percent to $27.31 in trading on the New York Stock Exchange. Shares in Fannie Mae, the larger of the two government-sponsored enterprises (GSEs), also rose, climbing 5.1 percent to $29.57.

Freddie Mac and Fannie Mae have struggled since last year to maintain a balance between managing rising credit losses and their business of providing money for U.S. mortgages. Scrutiny of the companies has also intensified since they are among the few big financial institutions whose access to credit has been largely unfettered amid the mortgage-led credit crunch.

The two companies have joined the ranks of banks raising capital to offset losses. Their federal regulator has encouraged them to bolster the capital base and increase exposure to the ailing housing market by lowering the minimum they must hold.

Freddie Mac said it would soon raise $5.5 billion in capital with common and preferred stock, after taking in $6 billion late last year. The fresh capital on top of the $6 billion held in excess of its current regulatory minimum and a further easing of a regulatory surplus requirement will significantly boost the company's earnings power, Chief Financial Officer Buddy Piszel told Reuters.

The company, one of the biggest investors in U.S. mortgage bonds, has already purchased about $100 billion in securities, he said. The purchases have been "essentially" Freddie Mac's participation certificates, or the mortgage-backed securities packaged and guaranteed by Freddie Mac, he said.

Freddie Mac in 2008 expects to see 40 percent to 50 percent growth in its investment income and 15 percent to 20 percent growth in its mortgage bond guaranty business, he said. The company mortgage portfolio increased in April to about $738 billion from $712 billion in March.

Piszel in March insisted the company was not planning any "dilutive" capital raise. While the capital may help the company become profitable, expected earnings are still not enough to offset the impact of shareholder dilution, said Stewart Capital's Polley, who doesn't own Freddie Mac.

Piszel said in an interview that the earnings power of the capital raised has to be considered when determining dilution.

"We are really pleased with the progress that we continued to make in the first quarter in strengthening our financial capabilities."

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