Nov. 20 -- Freddie Mac fell as much as 35 percent, the biggest decline since it went public in 1988, as the second- largest U.S. mortgage company posted a record loss and warned of a possible cut in the dividend and the need for additional capital.
The worst housing slump in 16 years caused ``significant deterioration'' in the third quarter that will continue through year-end, Freddie Mac said in a statement after reporting a net loss of $2.02 billion, or $3.29 a share, three times what some analysts estimated.
``It's as bad as it possibly could be,'' said Howard Shapiro, an analyst at Fox-Pitt Kelton in New York. Shapiro today downgraded Freddie Mac shares to ``sell'' from ``overweight.''
McLean, Virginia-based Freddie Mac and the larger Washington-based Fannie Mae, two institutions created by Congress to foster American home ownership, lost $41 billion in market value this year. The companies, which own or guarantee 40 percent of the $11.5 trillion U.S. home loan market, will have less money available for new mortgages.
``There is nothing we see right now to be more optimistic,'' Chief Financial Officer Anthony Piszel said in an interview. He told analysts on a conference call that the fourth quarter ``is not going to be pretty.''
The shares fell the most ever, extending their slump to a fifth day, on concern that the losses will continue into next year. Freddie Mac fell $9.04, or 24 percent, to $28.46 at 10:54 a.m. in New York Stock Exchange composite trading after tumbling as low as $24.31 earlier in the day. Fannie Mae dropped 19 percent to $30.55.
Fitch Ratings said it may reduce the company's AA- preferred stock ranking.
No Optimism
Freddie Mac provided $1.2 billion for credit losses and reduced the value of assets by $3.6 billion. The third-quarter loss was almost triple the $715 million a year earlier.
The fourth quarter will also prove ``difficult,'' Chief Executive Officer Richard Syron told analysts on a conference call today.
A slump in the value of mortgages reduced core capital to $600 million more than its regulatory requirements, prompting Freddie Mac to seek more money. Freddie Mac ``is seriously considering'' reducing its fourth-quarter dividend by 50 percent, according to the company's statement today. The company also hired Goldman Sachs Group Inc. and Lehman Brothers Holdings Inc. to advise it on capital options.
Congress created Fannie Mae and Freddie Mac to increase mortgage financing by buying loans from lenders. They profit by holding mortgages and mortgage bonds as investments and by charging a fee to guarantee and package loans as securities. They record losses when defaults rise.
Great Depression?
Wells Fargo & Co. Chief Executive Officer John Stumpf last week said the housing market was the worst since the Great Depression. Banks and securities firms worldwide have already reported about $50 billion in losses from subprime mortgages, loans given to borrowers with weak credit, that have been defaulting at a record pace. The total damage may reach $400 billion, Deutsche Bank analysts said last week.
Freddie Mac's $713.1 billion portfolio as of September included $105 billion of securities backed by subprime mortgages. Fannie Mae's third-quarter net loss more than doubled to $1.39 billion.
``Even the strong credit managers with the best assets are not immune,'' said Jim Vogel, head of agency debt research at FTN Financial in Memphis, Tennessee.
Foreclosures Rise
Foreclosure filings doubled to 223,538 in September from a year earlier as subprime borrowers struggled to make payments on adjustable-rate mortgages, RealtyTrac Inc. said last month.
``We haven't at all seen the bottom,'' said Josh Rosner, managing director at New York-based research firm Graham Fisher & Co. Freddie Mac and Fannie Mae ``will perform in lockstep'' with other mortgage lenders because of their exposure to subprime borrowers.
Fannie Mae Chief Executive Officer Daniel Mudd said the average price of homes may fall as much as 4 percent in 2008, causing Fannie Mae's loan loss ratio to potentially more than double to 10 basis points.
The company's capital in excess of its current minimum regulatory requirement fell by $1.2 billion from June 30 to $600 million on Sept. 30. Freddie Mac's required capital level is 30 percent larger than what would typically be required as the company recovers from accounting mistakes revealed in 2003.
The announcement today is Freddie Mac's third regular quarterly release in five years. The company stopped providing earnings after disclosing in 2003 that it understated two years of results by $5 billion.
Timely Reports
Freddie Mac plans in February to file results for all of 2007. Since revelations of the accounting errors, the Office of Federal Housing Enterprise Oversight has required the company to curb growth, set aside 30 percent more capital than usual and overhaul accounting, internal controls and governance.
Fannie Mae and Freddie Mac have been constrained from buying mortgages because of restrictions imposed last year. Ofheo in September loosened limits on the government-chartered companies' holdings, in an effort to ease a housing slump that's caused other mortgage investors to retreat.
Freddie Mac's portfolio of mortgages and related securities was $703.1 billion in October.
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