Freddie Mac Shares Fall on Loss, To Cut Dividend

Freddie Mac Wednesday posted its fourth straight quarterly loss as it braced for a prolonged housing crisis by setting aside twice as much money for bad loans and setting plans to slash its dividend by at least 80 percent.


The worse-than-expected results come just three weeks after U.S. authorities orchestrated a sweeping effort to prop up the second-biggest provider of U.S. residential mortgage funding and its rival Fannie Mae , Freddie Mac affirmed a commitment to raise fresh capital.

Freddie Mac's chief financial officer repeated that it continues to maintain a surplus over regulatory capital requirements, and said the company can wait for "choppy" market conditions to improve before raising capital, which could exceed $5.5 billion.

For the second quarter, McLean, Virginia-based Freddie Mac reported a loss of $821 million, or $1.63 cents per share, compared with a profit of $729 million, or 96 cents per share, a year earlier.

That included the first loss from its holdings of subprime and other risky loans, which formed a significant part of its $2.8 billion in realized and anticipated losses stemming from the steepest U.S. housing downturn since the Great Depression.

"Credit-related expenses were far higher than what guidance had been," said Rajiv Setia, a strategist at Barclays Capital in New York.

Barclays was expecting about $2 billion, "and that was on the high side" of analyst estimates, he said.

It was not immediately clear whether the loss was directly comparable with the average estimate among Wall Street analysts for a loss of 28 cents per share, according to Reuters Estimates.

Fourth Straight Loss

The second-quarter loss follows a $151 million loss in the first quarter and brings its cumulative loss over the past four quarters to more than $4.6 billion.

"While we expect continued housing and economic weakness will affect our overall performance this year, we continue to maintain a surplus over all regulatory capital requirements," Chairman and Chief Executive Richard Syron said in a statement. (See video on Freddie's earnings.)

"We remain committed to raising $5.5 billion of new capital and will evaluate raising capital beyond this amount depending on our needs and as market conditions mandate."

Chief Financial Officer Buddy Piszel told Reuters it was still reasonable to expect a housing market recovery by early 2009, but "we have to prepare for a stress condition that looks worse than that."

Freddie Mac shares plummeted by more than 17 percent from yesterday's closing price of $8.04.

Freddie Mac and rival Fannie Mae faced a storm of stock selling last month as investors speculated the companies would fall short of the capital needed to offset losses sustained from delinquent mortgages.

The turmoil led U.S. Treasury Secretary Henry Paulson, in concert with U.S. Federal Reserve Chairman Ben Bernanke, to arrange emergency measures that bolstered government backing for the companies.

Dividend Slash

To help preserve capital, Freddie Mac said it would slash its quarterly dividend, pending board approval, by at least 80 percent to 5 cents a share or less from 25 cents a share.

On an annualized basis, that will save Freddie Mac more than $500 million based on current shares outstanding.

It will also halt the rapid growth in its $792 billion portfolio as it becomes more conservative with capital, Chief Financial Officer Buddy Piszel told Reuters.

The company will still make purchases to replace loans matured or refinanced from its portfolio, he said.

Freddie Mac, along with its larger rival Fannie Mae, owns or guarantees more than $5 trillion in mortgages, or nearly half of all U.S. home loans.

Freddie said revenue rose by more than 10 percent from the first quarter to $1.69 billion, including a increase of 92 percent in net interest income to $1.5 billion.

But the company more than doubled its provisions for loan losses to $2.5 billion since the end of the first quarter.

All credit-related expenses surged to $2.8 billion in the quarter from $1.4 billion in the previous quarter and $463 million a year earlier.

Total credit losses rose to $810 million from $528 million in the first quarter.

Freddie Mac shares closed Tuesday at $8.04, up 6.9 percent on the session amid the biggest one-day gain for the benchmark Standard & Poor's 500 in four months.

While the stock has more than doubled from its early-July low of $3.89, it remains nearly 90 percent below its 52-week high of $66.65 set last August.