Freddie Mac loss swells as mortgage crisis deepens

By Al Yoon

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.