Freddie Mac loss swells as mortgage crisis deepens

NEW YORK (Reuters) - Freddie Mac (FRE.N), the second-biggest provider of U.S. residential mortgage funding, on Thursday said its fourth-quarter loss widened to a record $2.5 billion as the housing crisis worsened.

Freddie Mac, as well as rival Fannie Mae (FNM.N), suffered from soaring defaults on mortgages guaranteed by the two companies as nationwide home prices declined in 2007 for the first time since the Great Depression.

The company also warned it expected to lose billions of dollars more in upcoming quarters as the housing market slump deepens and more borrowers fall behind on payments.

Regulators have loosened restrictions on the two government-sponsored enterprises (GSEs) in the hope they will be able to prop up real estate by holding financing costs down for a bigger pool of home buyers. The GSEs hold charters from Congress to boost homeownership.

However, the companies' staggering losses and desire to protect capital in a crumbling credit market has curbed their power to stabilize the housing market.

Fannie and Freddie have had to raise fees to lenders, which analysts said may extend the credit crunch the GSEs are being asked by Congress to undo.

The mortgage finance companies' capital is strained as they must write down the values of mortgage securities they own and their contracts to guarantee mortgages backing bonds they issue. At the same time, capital is needed to back new investments and rapid growth in their mortgage guarantee businesses.

Losses led the companies to raise $13.8 billion through the sale of preferred stock last quarter.

"Freddie Mac's ability to maneuver in 2008 is severely limited after fourth-quarter results ate through almost one half the preferred capital raised during the period," Jim Vogel, a strategist at FTN Financial in Memphis, Tennessee, said in a note to clients.

Freddie Mac lost $3.97 per share in the fourth quarter -- far more than Wall Street analysts' expectations of a loss of $2.48 per share, according to Reuters Estimates.

The McLean, Virginia-based company said its net loss increased from $401 million in the year-earlier period as it set aside more than $1 billion for expected defaults.

It is also coming off a $1.2 billion loss for the third quarter that was revised down from a $2 billion loss after an accounting change.

2008 SEEN AS 'TELLING' YEAR

Citing the "severe" housing downturn, Freddie Mac increased its estimate of total credit losses by a combined $1.5 billion for 2008 and 2009. It now expects to lose $2.2 billion and $2.9 billion over the next two years, respectively.

"We will be cautious going into the year because we think 2008 will be a very telling year as to where the credit market is going," Buddy Piszel, Freddie Mac's chief financial officer, told Reuters.

Credit-related expenses were $912 million for the quarter, while total credit losses were $236 million.

The Office of Federal Housing Enterprise Oversight, the federal regulator for Freddie Mac and Fannie Mae on Wednesday lifted restrictions on the growth in the companies' combined $1.4 trillion portfolios, giving them more flexibility to support the ailing housing market.

OFHEO also said it may ease a mandate to hold capital 30 percent in excess of their usual minimum, a move which allow the companies room to grow.

The OFHEO comments on capital were a sign of "more optimism than certainly we've heard earlier," Piszel said.

Freddie Mac shares, which are down 27 percent this year, fell 2.4 percent to $24.49. Fannie Mae stock rose 2.3 percent.

OFHEO installed the penalties after more than $11 billion in accounting violations at the companies revealed weaknesses in risk management and disclosures. Both companies this week resumed "timely" financial reporting, and are near completion of other requirements to end the consent orders, OFHEO said.

The moves by OFHEO signal confidence in Freddie Mac and Fannie Mae that investors have taken to heart, said David Dreman, chairman of Jersey City, New Jersey-based Dreman Value Management, which recently added GSE shares.

Dreman owned 11.5 million shares of Freddie as of December 31, making it the 16th biggest holder, according to Reuters data.

Accounting rules overstate losses for the companies, which have "enormous" earning power once the housing market stabilizes, he said.

"You have to ask yourself why OFHEO is letting them take on more mortgages," he said. "The last thing the Fed, or the administration wants is for the companies to go out and buy more mortgages and blow up."

Forecasts of falling home prices and rising foreclosures through 2009 will probably keep the companies conservative with their capital, analysts said. Piszel said the company will use capital for buying opportunities but not grow aggressively.

As of January 1, Freddie Mac had $4.5 billion in capital above the amount mandated by OFHEO.

"It's really about having the capital flexibility to manage throughout the year," Piszel said.

(Additional reporting by Cal Mankowski; editing by Gary Crosse)