November 14, 2008 / 1:21 PM / 9 years ago

Record loss forces Freddie Mac to tap $100 bln fund

NEW YORK (Reuters) - Freddie Mac reported a $25.3 billion quarterly loss on Friday as the housing slump worsened, forcing the second-largest provider of U.S. home loan funding to draw on a $100 billion Treasury Department lifeline.

The company attributed much of the record loss to a write down of tax-related assets, essentially conceding it will not return to profitability soon. Writing down the assets left the company with a negative net worth, in which liabilities exceed its assets, requiring it to tap the Treasury backstop.

Freddie Mac said after tentative signs that the housing market was stabilizing in the second quarter, conditions worsened “dramatically” during July through September.

“The percentage decline in home prices was particularly large in California, Florida, Arizona and Nevada, where Freddie Mac has significant concentrations of mortgage loans,” the company said in a securities filing. Freddie Mac said the rising unemployment rate was the main culprit for the worsening housing market.

Freddie Mac’s third-quarter loss equaled $19.44 per share, compared with a loss, before preferred dividend payments, of $1.24 billion, or $2.07 per share, a year earlier.

A $14.3 billion charge for deferred tax assets pushed the company’s net worth to a negative $13.7 billion at the end of the third quarter, and shareholder equity to a negative $13.8 billion.

The government placed Freddie Mac FRE.P and its larger rival Fannie Mae FNM.P under conservatorship in September, pledging to inject capital as needed for the companies to operate and help stabilize the housing market. The move subordinated and nearly wiped out shareholders of Freddie Mac stock, which on Friday fell 12 percent to 64 cents.

The companies’ regulator has submitted a request for the Treasury Department to provide $13.8 billion for Freddie Mac to erase the shareholder equity deficit.

The McLean, Virginia-based company said it expects to receive the money from Treasury by Nov. 29.

“Ultimately, they are going to need more equity from the Treasury to backstop their equity, which is going to take more hits” as economic growth slows, said Malcolm Polley, chief investment officer at Stewart Capital Advisors in Indiana, Pennsylvania.

“Fannie and Freddie are also being pushed to be buyers of first resort” in mortgages, he said, which makes it harder for them to return to profitability.

Freddie Mac recorded $9.1 billion in write-downs on securities and $6.0 billion in other credit-related expenses.

Delinquencies on loans backing securities such as “Alt-A” loans and payment option adjustable-rate mortgages worsened far more than those on Freddie Mac-guaranteed debt, it said. Alt-A loans, which require little or no proof of income, caused 50 percent of Freddie Mac’s credit losses in 2008.

The government took over Freddie Mac and Fannie Mae on concern that mortgage losses were eroding the capital they needed to operate as the top funders of residential loans. Regulators and lawmakers are leaning harder on the companies to perform their “missions” of stabilizing housing as the credit crunch froze funding from Wall Street banks and other sources.

Freddie Mac and Fannie Mae own or guarantee nearly half of all U.S. mortgages.

Soaring funding costs for the unsecured “agency” debt of Freddie Mac and Fannie Mae have hindered their ability to buy mortgages, even with a government backstop.

Investors have demanded higher returns for buying the companies’ debt due to questions about the government’s commitment to the companies once they emerge from conservatorship, and amid a federal plan that offers stronger guarantees on bank debt.

Freddie Mac five-year unsecured debt yielded 1.36 percentage points more than similar Treasury notes, compared with 1.31 percentage points on Thursday. The yield premium nearly doubled from mid-September.

Those higher rates have hamstrung Fannie Mae’s and Freddie Mac’s ability to buy mortgage-backed securities, which have also suffered from waning demand from foreign investors and capital-constrained banks. Fewer buyers push up yields on the securities and can mean higher consumer borrowing rates.

“It’s not the current size of the losses that’s important, it’s the market’s concern about ‘unending’ losses that represents the biggest drag on MBS and agency spread performance into next year,” Jim Vogel, a strategist at FTN Financial in Memphis, Tennessee, said in a client note.

“Freddie’s losses need to slow back to the $2-$4 billion range, and cumulative draws on Treasury need to indicate a maximum of $25-$30 billion by the end of 2009,” he said.

Reporting by Al Yoon; Editing by Tom Hals

Our Standards:The Thomson Reuters Trust Principles.
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