UPDATE 3-Freddie Mac posts loss, sees need for govt funds

(Adds details, background)

By Al Yoon

NEW YORK Feb 24 (Reuters) - Freddie Mac FRE.N, the second-largest provider of U.S. residential mortgage funds, on Wednesday said it lost $7.8 billion in the fourth quarter and warned it would need to tap more government funds this quarter as the housing market remains fragile.

The government-controlled entity said its loss came as rising defaults kept credit-related expenses elevated at $7.1 billion and as it wrote down the value of low-income tax credit partnership investments.

The loss was $6.5 billion before a $1.3 billion dividend payment on senior preferred stock owned by the U.S. Treasury.

Freddie Mac has been struggling to contain losses sustained from its massive exposure to the U.S. housing market that is in the throes of its worst downturn since the 1930s. Fearing that losses would harm Freddie Mac's ability to support housing, the government placed the company into conservatorship in September 2008 and recently pledged unlimited financial backing.

Chief Executive Charles Haldeman said Freddie Mac expects the decline in home prices and sales to subside sometime this year due to low interest rates, affordability and the government's home buyer tax credits, which are due to expire on June 30.

"Still, the housing recovery remains fragile, with significant downside risk posed by high unemployment and a potential large wave of foreclosures," he said in a statement.

While Freddie has managed three straight quarters without tapping the Treasury credit line, it said changes to accounting rules adopted in 2010 would likely result in another trip to Uncle Sam in the current quarter.

Since late 2008, the Treasury has purchased about $52 billion in Freddie Mac senior preferred stock that is costing about $5.2 billion a year in dividends.

The cost of the dividends alone exceeds what Freddie has earned in most years, and will likely complicate efforts by Congress to overhaul the shareholder-owned, government-backed business model undone by the financial crisis. Fannie Mae FNM.NFNM.P, the other, larger government-controlled mortgage finance company, is in a similar position.

The Obama administration has yet to lay out a long-term vision for both Fannie and Freddie.

Treasury Secretary Timothy Geithner told lawmakers on Wednesday the administration would lay out broad principles for the two entities this year, but legislative proposals would not come until 2011.

A hearing on the future of housing finance that had been scheduled for March 2 by the chairman of the House of Representatives Financial Services Committee, Barney Frank, has been postponed, with no new date yet set.

Federal Reserve Board Chairman Ben Bernanke told the House Financial Services Committee on Wednesday the U.S. central bank would not support a return to the pre-conservatorship quasi-governmental status.

"We would not support -- let me be careful -- I think we would be very cautious about supporting a return to the existing structure where you have this potential conflict between private shareholders and the public objectives," Bernanke said.

"I think there are alternatives... which would be a more stable long-term solution, including either a privatization approach with government guarantees or a public utility approach," Bernanke added.

Serious delinquencies on mortgages guaranteed by Freddie Mac jumped to 3.87 percent as of December from 3.33 percent in the third quarter, and 1.72 percent at the end of 2008. As in previous periods, Freddie Mac said the delinquencies, and related costs, rose as government and other loss mitigation programs extended the foreclosure process.

Freddie Mac said it made errors in calculating prospective losses, requiring it to revise results for the first three quarters of 2009 and increase its third-quarter credit loss provision by $396 million.

The Jan. 1 adoption of new rules that require securitized assets be accounted for on balance sheet has reduced Freddie's total equity by $11.7 billion, also increasing the likelihood it will need more money from Treasury.

Net interest income on investments rose to $4.5 billion in the fourth quarter from $4.46 billion in the third, helped by a decrease in its funding costs. (Additional Reporting by Corbett B. Daly, Editing by Leslie Adler)