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WASHINGTON: Troubled mortgage finance giant Freddie Mac reported a shocking loss in the second quarter that bodes ill for the US taxpayer after the government's huge rescue package.
Freddie Mac and twin Fannie Mae, government-chartered, shareholder-owned mortgage firms that underpin roughly half the US housing market, were thrown a federal lifeline a week ago amid the worst housing crisis in decades.
"It has been more than a year since the housing market went on a tumultuous skid. Yet, the hangover from bad lending practices and tighter credit has housing's two primary sponsors, Fannie Mae and Freddie Mac, still unable to step in and fully provide support," said Jeffrey Ham, an analyst at Briefing.com
As their plunging shares raised questions of solvency, the government offered Freddie Mac and Fannie Mae aid that could cost US$25 billion in the next two fiscal years, according to the Congressional Budget Office.
"Without the lifeline many fear the two government-sponsored enterprises lacked the capital to absorb losses associated with further deterioration in the housing market," Ham said.
Economists say the housing collapse has not yet hit bottom.
Treasury spokeswoman Brookly McLaughlin reiterated that the Treasury has no plans to use the temporary authorities of the rescue package, which allow the Treasury to buy equity in the two firms to boost their capital.
"We have a responsibility to the taxpayer and to the overall financial system to thoroughly analyze and understand these authorities, should circumstances ever warrant their use," she said, in explaining the Treasury had hired Wall Street investment bank Morgan Stanley for advice.
Freddie Mac reported it had a second-quarter net loss of US$821 million, with the loss per share at US$1.63, more than triple most analysts' forecasts of 53 cents per share.
The financial results were severely impacted by a US$2.5 billion charge for credit losses from rising delinquencies, foreclosures and falling home prices, it said.
Investors punished the twin firms: Freddie Mac plunged 19.15 per cent to US$6.50 and Fannie Mae shed 15 per cent at US$11.56.
Fannie Mae is due to publish its financial results Friday.
Freddie Mac's second-quarter results were worse than the prior quarter, when the firm posted a net loss of US$151 million and a US$1.2-billion charge for credit losses.
The company reaffirmed its July commitment to raise US$5.5 billion of new capital and suggested it would seek more if needed.
"While we expect continued housing and economic weakness will affect our overall performance this year, we continue to maintain a surplus over all regulatory capital requirements," chairman and chief executive Richard Syron said in a statement.
Freddie Mac also said it wanted to slash its 25-cent dividend in the third quarter by at least 80 per cent, subject to approval by the board of directors.
The Federal Home Loan Mortgage Corp., known as Freddie Mac, insisted its "liquidity position remains strong."
Moody's credit agency said it continues to review for possible downgrade Freddie Mac's stock and financial strength ratings.
"As expected, asset quality continues to deteriorate," said Brian Harris, Moody's senior vice president.
- AFP/yb
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