Freddie Posts Loss, Cuts Dividend as Slump Deepens (Update3)
By Dawn Kopecki
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Aug. 6 (Bloomberg) -- Freddie Mac, the U.S. mortgage-finance company hobbled by record foreclosures, slashed its dividend at least 80 percent after posting a quarterly loss that was three times wider than analysts' estimates.
Freddie dropped 19 percent in New York trading and the larger Fannie Mae declined 15 percent on mounting concern that the government-chartered companies will sacrifice shareholders to bolster capital. Freddie doubled its reserves for future home- loan losses to $2.8 billion, a sign that Chief Executive Officer Richard Syron sees no end in sight to the worst housing slump since the Great Depression.
The results, combined with Syron's delay in selling $5.5 billion in stock, increased speculation U.S. Treasury Secretary Henry Paulson will use his new power to pump money into Freddie. Syron said the McLean, Virginia-based company will wait to sell shares at ``a more propitious time.'' Meantime the company may slow purchases for its $792 billion portfolio of mortgages and slice the dividend to avoid breaching regulatory capital requirements.
``This report significantly shortens the timeline for Treasury intervention,'' said Ajay Rajadhyaksha, the head of fixed-income research for Barclays Capital in New York. With the value of Freddie's outstanding stock now at $4.3 billion ``I don't see how they can raise capital by themselves without a capital infusion from Treasury,'' he said.
Freddie today reported a second-quarter net loss of $821 million, or $1.63 a share, its fourth straight loss, compared with the 54 cents a share average estimate of nine analysts in a Bloomberg survey. The company reported net income of $764 million, or $1.02 a share, in the year-earlier period.
Would be `Folly'
The company has 22,000 properties in foreclosure, the most since it was created in 1970 during the Vietnam War and now anticipates losing 26 percent on each loan, up from 22 percent. The fair value of its assets fell to a negative $5.6 billion.
``Neither we nor anyone else can predict when the housing market will recover and it would be folly for anyone to try to do so,'' Syron, 64, said on a conference call with analysts today. ``There's still a large amount of inventory to work through the system and record foreclosures continue to be the problem, pushing results down further.''
Needing Capital
Freddie is scrambling to bolster capital as losses on mortgage holdings grow. Concerns over the finances of Freddie and Fannie prompted Paulson to seek power last month to bail out the companies. Syron committed in May to raise $5.5 billion in stock though failed to complete the sale as the shares plunged. Syron today said the company may need to wait for the stock to rise.
Bill Gross, who manages the world's biggest bond fund, said the Treasury will probably end up injecting as much as $30 billion into both Freddie and Fannie.
``It's obvious that current and future losses as typified by Freddie today require regulatory capital,'' Gross, co-chief investment officer at Pacific Investment Management Co. in Newport Beach, California. ``That's the Treasury.''
Freddie fell $1.55 cents to $6.49 in New York Stock Exchange composite trading, ending at its low of the day. Fannie dropped $2, or 15 percent, to $11.60. Washington-based Fannie is scheduled to report earnings Aug. 8.
Shrinking Capital
The loss shrank the company's capital to $37 billion from $38 billion three months earlier and reduced its cushion over the surplus demanded by regulators to $2.6 billion from $6 billion. Without a share sale, the company may fall short of its surplus requirements, Freddie said in a filing today.
The common-share dividend cut to 5 cents or less from 25 cents, the second reduction in nine months, will add $500 million to capital, Chief Financial Officer Anthony Piszel said in a telephone interview. The preferred stock won't be affected, Freddie said in a statement.
Freddie will slow its purchases of mortgages, keeping its portfolio unchanged, and may even sell some securities to shore up capital, Piszel said. That may further damp earnings.
Fannie and Freddie, government-sponsored enterprises created by Congress to boost mortgage financing, own or guarantee 42 percent of the $12 trillion U.S. home loans outstanding. They make money by holding mortgage assets that yield more than their debt costs, and by guaranteeing bonds they create out of loans.
Mortgage Delinquencies
Almost one out of every 10 mortgages in the U.S. was in trouble during the first quarter, the highest in records dating to 1979, according to the Mortgage Bankers Association in Washington. Delinquencies, or home loans with payments 30 days or more overdue, rose to 6.35 percent of outstanding mortgages and the share of homes in foreclosure rose to 2.47 percent. Freddie's properties in foreclosure are triple that of 2002.
The company wrote down the value of subprime and low-quality mortgage securities for the first time, taking a loss of $826 million, adding to signs it sees tougher times ahead.
Freddie's fair value, a measure of solvency was negative $5.6 billion at the end of the second quarter.
Credit losses were 17.3 basis points over the average total mortgage portfolio, up from 11.6 basis points in the first quarter.
The company is no longer forecasting losses because the decline has been too hard to predict, Piszel said.
Freddie had projected credit losses of 12 basis points or $2.2 billion for this year and 14 basis points or $2.9 billion in 2009. Orenbuch said he expects Freddie's credit losses to rise to 20 basis points this year and 29 basis points in 2009.
Freddie is also searching for a new CEO, a process that is ``taking longer than we'd hoped,'' Syron said. Hired in mid 2004, Syron was supposed to name a successor within three years.
Candidates including American Express Co. CEO Kenneth Chenault and BlackRock chief Laurence Fink both turned down the offer, the New York Times reported this week.
To contact the reporter on this story: Dawn Kopecki in Washington at dkopecki@bloomberg.net;
Last Updated: August 6, 2008 16:34 EDT
