Freddie Mac posts loss as mortgage market soured

(changes headline, adds quotes from chief financial officer, adds byline and details)

By Lynn Adler

NEW YORK, June 14 (Reuters) - Freddie Mac, the No. 2 U.S. mortgage finance company, on Thursday reported an unexpected net loss of $211 million for the first quarter, citing a souring outlook for mortgage credit risk that widened credit spreads.

The loss contrasts with a net gain of $2 billion the company reported for the same period in 2006.

The company reported a net share loss of 46 cents in the first quarter. Excluding unusual items, Freddie Mac was expected to show a profit of $1.09 per share in the first quarter, according to Reuters Estimates.

With this report, Freddie Mac (FRE.N) resumes quarterly financial reporting for the first time since its 2003 accounting scandal, which led to a $5 billion restatement of past earnings.

The company said mark-to-market losses tied to the wider credit spreads on the mortgages assets in its portfolio was the main driver of the first-quarter loss.

"The volatility in our results will continue," Buddy Piszel, chief financial officer at Freddie Mac, said in an interview. The swings are driven by "the predominant impact of mark-to-market items on both our GAAP and fair value."

Freddie Mac also said its fair value, before capital transactions, fell by about $300 million because of the credit spread widening. This measure showed a profit of $1 billion in the first quarter of last year.

The company's retained mortgage portfolio grew by 6 percent on an annualized basis in the first quarter to about $714 billion.

Under agreement with its regulator, the Office of Federal Housing Enterprise Oversight (OFHEO), Freddie Mac is limiting the growth of its portfolio as it hashes through its accounting and financial reporting problems.

"The punch line is that while the printed numbers don't look great, we feel pretty good about the overall performance of the firm," Piszel said. "We do feel that on a long-term basis that we're very well positioned."

Freddie Mac said in a news release that its credit guarantee portfolio showed "credit characteristics that were better than historical averages as measured by current delinquencies, loan-to-value ratios and charge-offs."

The company estimated its regulatory core capital was $36.2 billion at the end of March, $2 billion more than the 30 percent surplus required by OFHEO.

Piszel said Freddie Mac was gaining confidence in its ability to produce its financial information accurately and more quickly.