Freddie Mac hit by huge loss, says needs capital

By Patrick Rucker

WASHINGTON (Reuters) - Freddie Mac (FRE.N), the No. 2 U.S. mortgage finance company, on Tuesday stunned Wall Street with a unexpectedly wide loss and plans to slash its dividend or use other means to raise capital to withstand a continuing downturn in the housing market.

Freddie Mac shares lost more than one-quarter of their value after reporting a net loss of $2 billion, blaming falling home prices and tighter credit conditions for having increased the number of borrowers defaulting on their mortgages. It was the worst one-day percentage drop ever and pummeled the stock to an 11-year low.

While the report was a blow to shareholders, it was also bad news for homeowners who need Freddie Mac's lending resources, which have funded millions of mortgages under a congressional mandate since 1970. The company's dwindling capital will crimp its ability to play its role fostering home ownership in a market already hit by lender pullbacks.

In a briefing, Chief Executive Office Richard Syron offered little hope for a quick recovery and instead emphasized a need for fast action to bolster its finances.

"Given the continuation of the same market trends that produced these results through October and November, it is likely that the fourth quarter will prove difficult as well," he said in a conference call to investors.

Freddie Mac said it has hired Goldman Sachs and Lehman Brothers to help it raise capital in the "very near term" as its soaring losses force it to build reserves that will satisfy its regulator.

The company said it is considering a preferred stock sale to boost reserves. CNBC reported that this might be done in concert with the other main government sponsored enterprise, known as a GSE, Fannie Mae (FNM.N) to offer the securities.

Other alternatives could include cutting back on lending or cutting the dividend. Freddie Mac has never trimmed its dividend since going public in 1989, but the company said Tuesday that it may cut its fourth quarter payout 50 percent.

"I suspect it will continue to worsen in terms of actual defaults," said Charles Lieberman, chief investment officer of Advisors Capital Management LLC in Paramus, New Jersey, which owns Freddie shares.

The housing market has been gripped by uncertainty since homes going into foreclosure surged to record levels at the end of last year, mostly in the risky subprime sector. Freddie Mac's loans are largely made up of higher quality debt and its problems show a continuing widening out of the nation's housing debt problem.

The dismal report dragged shares of larger rival Fannie Mae (FNM.N) down about 20 percent. Countrywide Financial Corp. (FRE.N), the largest U.S. mortgage lender, also was under pressure as it stock fell sharply, though it denied Wall Street rumors that it was suffering liquidity problems.

Buddy Piszel, Freddie Mac's chief financial officer, said the housing market will hurt the company's bottom line for some time even though the company mostly deals in low-risk home loans offered to strong borrowers.

"Certainly, when housing markets deteriorate, that has an impact. We clearly will incur higher costs with markets being what they are," said Piszel.

The $2 billion loss, or $3.29 a share, compared with a loss of $715 million, or $1.17 a share, in the year-ago period. Wall Street analysts, on average, had expected Freddie Mac to report a third quarter loss of $2.16 per share.

The increase in the number of its loans heading into foreclosure has forced the company to increase its provisions for failing loans. It added $1.2 billion for credit losses and increased fees for guaranteeing the payment on home loans.