Freddie Mac #s are a huge wake up call, because they don't do subprime.
Freddie Posts Loss, May Cut Dividend; Shares Plunge (Update6)
By James Tyson
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Nov. 20 (Bloomberg) -- Freddie Mac fell more than 30 percent, the biggest decline since it went public in 1988, as the second- largest U.S. mortgage-finance 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, McLean, Virginia-based 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.''
Freddie Mac and the larger Washington-based Fannie Mae, created by Congress to foster American home ownership, have lost $41 billion in market value this year as mortgage defaults and foreclosures rose to record levels. 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 losses will continue into next year. Freddie Mac fell $11.98, or 32 percent, to $25.52 at 1:27 p.m. in New York Stock Exchange composite trading after tumbling as low as $24.31 earlier today. Fannie Mae dropped 25 percent to $28.12.
Fitch Ratings said it may reduce Freddie Mac's AA- preferred stock ranking.
No Optimism
Freddie Mac had $1.2 billion in provisions 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 Freddie Mac's regulatory requirements, prompting the company to seek more money.
The company ``almost in the immediate future'' will announce how it will increase capital, including the possibility of reducing its fourth-quarter dividend by 50 percent, Syron said in a conference call with investors. Freddie Mac also hired Goldman Sachs Group Inc. and Lehman Brothers Holdings Inc. as advisers.
Should a dividend reduction fail to help meet capital reserve requirements, Freddie Mac may consider limiting growth, slowing purchases in its guarantee portfolio and selling common and preferred stock or convertible preferred stock, the company said.
Portfolio Reduction
Freddie Mac cut its portfolio by $29 billion in September and October, Piszel noted in the interview.
``What we're trying to do is not force ourselves to continue to have to react in that way,'' he said. Such reductions run ``counter to our mission of liquidity and stability.''
``Determinations about what we do with our capital, both on capital raising and dividend actions, are the board's decision and we have to give the board the opportunity to make that call,'' Piszel said.
Freddie Mac's regulator, the Office of Federal Housing Enterprise Oversight, endorsed the company's capital plans.
The company's ``announcement of the steps it intends to take reflects prudential actions,'' Ofheo Director James Lockhart said in a statement. ``These actions should enhance its ability to continue to fulfill its housing finance mission.''
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.
Merrill Lynch & Co., the world's largest brokerage, on Oct. 24 reported $8.4 billion of writedowns on mortgage-related investments and corporate loans. Citigroup Inc., the largest U.S. bank by assets, said this month it may have to write down $11 billion more in subprime mortgage-linked securities.
Freddie Mac's $713.1 billion portfolio as of September included $105 billion of securities backed by subprime mortgages.
``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
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. Fannie Mae's third-quarter net loss more than doubled to $1.39 billion.
Homebuilding permits in the U.S. fell 6.6 percent in October to 1.178 million, the lowest level since 1993, as construction of single-family homes tumbled, the U.S. Commerce Department said today in Washington.
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.
Timely Reports
Credit-default swaps tied to Freddie Mac's bonds rose 14 basis points to 69 basis points, according to broker Phoenix Partners Group in New York. The contracts are trading at the highest in at least four years, Credit Suisse Group data show. An increase in the contracts, used to speculate on the company's creditworthiness, signals deterioration in investor confidence.
Freddie Mac'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.
Today marks Freddie Mac's third regular quarterly release in five years. The company stopped giving earnings after disclosing in 2003 that it understated two years of results by $5 billion.
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.
To contact the reporter on this story: James Tyson in Washington at at jtyson@bloomberg.net
Last Updated: November 20, 2007 13:44 EST
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