WASHINGTON Freddie Mac FMCC.OB, the second-largest source of U.S. mortgage finance, said on Thursday it needed to borrow an extra $6 billion from the federal government as the shaky U.S. housing market resulted in its worst quarterly loss in more than a year.
The government-owned company said it lost $4.4 billion in the third quarter, a big increase from a $2.5 billion loss in the year-ago period.
Low sale prices on foreclosed homes in its inventory, low mortgage rates on its refinanced loans, and losses on derivative investments continued to drain cash from the lender that the government rescued in 2008.
The company warned of further weakness ahead as the pace of foreclosure sales picks up.
Freddie Mac has already drawn $72.2 billion in taxpayer funds and needs extra public money to cover its latest loss plus a $1.6 billion dividend payment to the U.S. Treasury.
The company and its larger rival Fannie Mae FNMA.OB were seized by the government at the height of the financial crisis in 2008 as mortgage losses piled up, threatening their solvency.
Given the crucial role the two play in the U.S. housing finance system, owning or guaranteeing about half of all mortgages, the U.S. Treasury has seen them as too important to fail.
Freddie Mac's Chief Executive Officer Charles Haldeman said a weak labor market and fragile economy had made many potential home buyers sit on the sidelines or opt to rent, despite relatively low prices and record low mortgage rates.
"Looking ahead, we expect the tepid recovery to continue to put downward pressure on house prices into early next year," Haldeman said in a statement.
Freddie Mac and Fannie Mae buy mortgages and repackage them as securities for investors, which they then guarantee, a critical role to keep mortgage funds flowing. Together with the Federal Housing Administration, the two government-sponsored enterprises provide financing for 90 percent of all new U.S. home loans.
With home prices still off sharply from their 2006 peak, both government sponsored enterprises are facing mounting costs from a backlog of repossessed properties on their books. Freddie Mac spent $221 million in the third quarter to maintain homes that have been foreclosed on, up from $27 million for the previous quarter.
The U.S. Treasury has offered the two companies an unlimited credit line through 2012. Both the Obama administration and Congress want to eventually wind them down.
Fannie Mae, which reports on third quarter earnings later this month, has drawn nearly $105 billion in taxpayer funds since 2008. The two government-owned companies have returned about $30 billion to the U.S. Treasury in dividends, leaving their net cost to taxpayers at about $145 billion.
Earnings reports earlier in the year had shown Freddie Mac setting aside less money to cover potential credit losses. This quarter, however, Freddie set aside $3.6 billion for credit losses from single-family home loans, up from $2.5 billion in the prior quarter.
The company said it expected it would have to set aside more money going forward to cover potential losses as lenders step up foreclosure activity that had been put on hold as they resolved questions over faulty loan documentation.
Aside from continued weakness in housing, Freddie's performance in the third quarter reflected a $4.8 billion loss on derivatives it uses to hedge its exposure to interest rates movements. A year earlier, it faced a derivatives loss of only $1.1 billion.
The regulator for Freddie Mac and Fannie Mae last week predicted the two firms' cumulative net costs to U.S. taxpayers will be $121 billion to $193 billion through 2014, when future dividend payments are taken into account. A year ago, it had forecast a cost of $221 billion to $363 billion for the period through 2013.
(Reporting by Margaret Chadbourn; Editing by Andrew Hay)