Freddie Mac’s $2 Billion Loss

November 20, 2007 No Comments »

Freddie Mac announced third quarter earnings this morning, chalking a $2 billion loss, or $3.29 a share, compared to a loss of $715 million, or $1.17 a share in the third quarter of 2006.

“The increased net loss, year-over-year, was primarily due to higher credit-related expenses and mark-to-market losses on the company’s portfolio of derivatives and credit-related items,” Freddie Mac said in a press release.

During the third quarter, Freddie recorded mark-to-market losses of $2.7 billion, nearly double the $1.5 billion it saw in the third quarter of 2006.

It was the largest quarterly loss ever for the nation’s second largest mortgage financier, and a loss that far exceeded Wall Street analysts’ expectations of $2.16 per share.

“Without doubt, 2007 has been an extremely difficult year for the country’s housing and credit markets and, as our third-quarter financial results reflect, we have been impacted by the deterioration in these markets,” Chairman and CEO Richard Syron said in a statement.

“We recognized the challenges facing the mortgage markets, however, and have taken further steps to address them.”

Freddie also said it set aside $1.2 billion in the third quarter for bad loans, a sharp increase from the $112 million it set aside a year earlier.

The company reported negative revenue of $678 million, compared to positive revenue of $91 million in the same quarter a year ago.

Freddie Mac, who saw the fair-market value of its net assets fall by $8.1 billion during the quarter, noted that it is “seriously considering” slashing its fourth quarter dividend in half, as the company grapples with money issues.

“When market conditions improve and Freddie Mac returns to sustainable profitability, the company will consider increasing the common stock dividend,” it said.

Freddie has also hired Goldman Sachs and Lehman Brothers as financial advisers to help the embattled company come up with new ideas to raise capital.

It was estimated that Freddie Mac’s regulatory core capital was just $600 million above the 30 percent mandatory target capital surplus directed by the Office of Federal Housing Enterprise Oversight.

That led the company to sell roughly $20 billion in unpaid principal balance of retained portfolio assets in September.

Freddie noted that it may have to curtail growth or reduce the size of its retained portfolio if it is unable to raise sufficient capital.

As of September, Freddie Mac’s $713.1 billion portfolio included $105 billion worth of securities backed by subprime mortgages.

Shares of Freddie Mac plunged a whopping $9.43, or 25.15%, to $28.07, well below their previous 52-week low of $36.66.

The news sent shock waves to Fannie Mae, with its shares plummeting $7.34, or 19.53%, to $30.24, also a new 52-week low.

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