UPDATE 2-Freddie Mac posts loss, sees need for govt funds

Wed May 5, 2010 6:18pm EDT

(Adds background, expected home price decline)

By Corbett B. Daly and Al Yoon

WASHINGTON/NEW YORK May 5 (Reuters) - Freddie Mac FRE.N, the second-largest provider of U.S. residential mortgage funds, on Wednesday said it lost $8.0 billion in the first quarter and warned that it would continue to need government funds because the housing market remains fragile.

The loss was $6.7 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, which has suffered its worst downturn since the 1930s.

Fearing that losses would harm Freddie Mac's ability to support housing, the government put the company in conservatorship in September 2008 and late last year pledged unlimited financial backing.

Chief Executive Charles Haldeman said the company is focused on strengthening its underwriting standards and improving credit quality.

"Though more needs to be done, we are seeing some signs of stabilization in the housing market, including house prices and sales in some key geographic areas," Haldeman said in a statement.

"But as we have noted for many months now, housing in America remains fragile with historically high delinquency and foreclosure levels, and high unemployment among the key risks," he said.

Freddie Mac, in a regulatory filing, predicted that U.S. home prices would fall further over the "near term" before there would be any sustained recovery in housing. It said it expects "a significant increase in distressed sales."

The loss of the federal homebuyer tax credit last month, as well as expectations of rising interest rates and high unemployment, will also sap home prices, Freddie said.

It said it expects to continue to rely on Uncle Sam, in part because of changes to accounting rules adopted in 2010.

"The size and timing of such draws will be determined by a variety of factors that could adversely affect the company's net worth," the firm said.

Since late 2008, the Treasury has purchased about $62.3 billion in Freddie Mac senior preferred stock, which is costing about $6.2 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, the other, larger government-controlled mortgage finance company, is in a similar position.

The Obama administration earlier this month began the process of overhauling the U.S. housing finance system, asking for public comment on what should be done.

Treasury Secretary Timothy Geithner has said he does not expect any substantive changes to the system until next year at the earliest.

Representative Scott Garrett of New Jersey, a consistent critic of both Fannie Mae and Freddie Mac, said the latest figures demonstrate the need to address their future as Congress considers sweeping changes to the U.S. financial system.

"Taxpayers are continually losing money on these failed enterprises, and at some point, we must say enough is enough," Garrett said. (Reporting Corbett B. Daly and Al Yoon; Editing by Dan Grebler)