Mortgage finance company Freddie Mac said Wednesday its first quarter loss widened to $151 million as the U.S. housing market worsened, though the results were not as poor as expected.
McLean, Va.-based Freddie Mac, the nation’s second-largest buyer and backer of home loans, plans to raise $5.5 billion in new capital, following a similar move last week by Fannie Mae, its larger government sponsored sibling.
It was the third-straight quarterly loss for Freddie Mac, which lost $4.5 billion in the second half of 2007.
Moody’s Investors Service downgraded the company’s financial strength rating, projecting Freddie Mac will be hit with up to $7.5 billion in total losses from soured mortgages over the next two years.
While critics say Freddie and Fannie pose a tremendous risk to the financial system should they collapse and require a government bailout, Freddie CEO Richard Syron said in a conference call with analysts that losses from the mortgage mess will be manageable “under any reasonable scenario.”
Company executives maintained their projection that average U.S. home prices will drop by 15 percent from their peak, but didn’t rule out greater declines. “It’s clear we have not yet hit bottom in the housing market,” Syron said.
Nevertheless, investors were encouraged that relaxed requirements by the company’s federal regulator will allow Freddie to play a larger role in the battered mortgage market. Also, Freddie, unlike Fannie, did not cut its dividend.
The company’s plan to raise capital — evenly split between common and preferred stock — is likely more conservative than many investors had expected, thus resulting in less dilution for existing shareholders, said analyst Jim Vogel of FTN Financial in Memphis, Tenn.
“There were a lot of bears on Freddie who felt they would have to raise still more,” common stock, Vogel said.
Freddie Mac’s shares gained $2.29, or 9.2 percent, to $27.25.
As a result of the planned stock sale, Freddie’s federal regulator said it would reduce the capital cushion the company must maintain.
The Office of Federal Housing Enterprise Oversight made a similar announcement last week for Fannie, which is raising $6.5 billion to fortify its balance sheet after posting a $2.2 billion first quarter loss.
Freddie Mac’s chief financial officer, Buddy Piszel, said the regulator’s move would allow Freddie to buy mortgage securities at attractive prices. “There’s a lot of supply...and not as much demand,” he said in an interview.
Freddie will be required to keep 15 percent more capital than required by law, down from the current 20 percent mandate. Another five-point cut is expected to come in September, as long as the company stays in good standing with the regulator.
The quarterly loss at Freddie was larger than a loss of $133 million in the January-March period last year. The results were equivalent to a loss of 66 cents a share, compared with 35 cents a share a year earlier.
Analysts surveyed by Thomson Financial had expected the government-sponsored company to lose 92 cents a share on average in the latest period.
Freddie Mac said it changed how it accounts for the value of derivatives, the complex financial instruments used to hedge against swings in interest rates. The company’s financial picture improved as a result.
The company lost more than $1.3 billion on derivatives in the first quarter, compared with nearly $2.3 billion in the fourth quarter of 2007.
Freddie said it set aside $1.2 billion for losses in the first quarter as a result of rising mortgage delinquency rates, falling home prices and sales. Revenue in the period, however, rose to $1.53 billion from $694 million a year earlier.
Piszel, however, cautioned that the company’s losses from the mortgage mess are likely to last through 2009.
Freddie is expecting total losses from bad mortgages and foreclosed properties to hit $3.1 billion this year, or 0.16 percent of the total value of mortgages the company guarantees. That’s up from an earlier projection of 0.12 percent.
“We would have to acknowledge that credit is worse,” Piszel said.
New data on foreclosures underscored that point. Foreclosure listing service RealtyTrac Inc. said Wednesday that more than 243,000 U.S. homes received at least one foreclosure-related filing in April, up 65 percent from the same month last year.
In response to growing economic distress, lawmakers are trying to come to terms with the White House on a broad package of housing legislation that would help an estimated 500,000 homeowners refinance into new loans, while tightening oversight over Fannie and Freddie.
Democrats are trying to attract enough Republican support to move the bill through the Senate, but it remained unclear whether they could draw enough support to do so.