updated 5/30/2006 8:21:41 PM ET 2006-05-31T00:21:41

Mortgage finance giant Freddie Mac, emerging from an accounting scandal, reported Tuesday that its income slid to $2.1 billion last year from $2.9 billion in 2004 as it paid to settle a suit by shareholders and took charges related to Hurricane Katrina.

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The government-sponsored company, which is the second-largest buyer and guarantor of home mortgages in the country, said that the $600 million or so of costs it incurred also stemmed from accounting changes. Earnings per share were $2.75, down from $3.94 in 2004.

Freddie Mac’s chairman and chief executive, Richard Syron, said federal regulators are considering imposing a cap on the company’s $724 billion mortgage investment holdings — as they did with rival Fannie Mae last week in a settlement of allegations of accounting misconduct.

Freddie Mac had previously planned to report its 2005 results in March, but needed more time to institute a new method of valuing some assets.

Fourth-quarter earnings last year at McLean, Va.-based Freddie Mac were $684 million, up from $377 million a year earlier, according to Tuesday’s report.

Last year saw “continued investment in the business capabilities, infrastructure and management team here at Freddie Mac,” Eugene McQuade, the company’s president and chief operating officer, said in a statement. “These investments position our company to achieve our long-term growth and return objectives, and to deliver long-term value to the market and our stockholders.”

The company said its bottom line was reduced by some $220 million it paid to settle litigation by shareholders related to its faulty accounting for 2000-2002, by about $133 million for Hurricane Katrina and by $265 million caused by accounting changes.

The loss for the hurricane stems from Freddie Mac’s guarantees of timely principal and interest payments on home loans and from its investment holdings of securities that are tied to mortgages in the Gulf Coast areas affected. Freddie Mac and Fannie Mae, its larger government-sponsored sibling, suspended for several months foreclosures on homes in the hurricane disaster areas for mortgages they own.

Freddie Mac said Tuesday that its losses from derivatives, the complex financial instruments used by it and Fannie Mae to hedge against swings in interest rates, fell to $1.36 billion from $4.48 billion in 2004.

McQuade disclosed plans to buy back $2 billion of company stock and to issue an additional $2 billion of new, preferred shares.

Earlier this year Freddie Mac’s chief financial officer, Martin Baumann, unexpectedly resigned from his post. McQuade has been acting as CFO while the company conducts a search for a successor.

An accounting crisis in mid-2003, when Freddie Mac disclosed that it had misstated earnings by some $5 billion — mostly underreported — for 2000-2002, brought the ouster of its top executives. The company paid a then-record $125 million civil fine in 2003 in a settlement with federal regulators, who blamed management misconduct for the faulty accounting.

That penalty was exceeded last Tuesday when Fannie Mae was fined $400 million and agreed to limit its growth in a settlement with regulators. A blistering report issued by the Office of Federal Housing Enterprise Oversight alleged accounting manipulation by Fannie Mae aimed at lining executives’ pockets and lying to investors about smooth growth in profits and earnings.

The developments came as Washington-based Fannie Mae, which has not filed an earnings statement since late 2004, corrects its accounting back to 2001 and struggles to emerge from an $11 billion scandal.

Freddie Mac and Fannie Mae were created by Congress to pump money into the home-mortgage market by buying home loans from banks and other lenders and bundling them into securities for sale on Wall Street. They have grown dynamically in recent years and now stand behind $4 trillion of home mortgages, representing about one-half of the single-family mortgages in the country.

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