Government-backed lender Freddie Mac halved its dividend and unveiled plans to sell $6 billion of preferred stock to bolster the mortgage investor's finances in anticipation of more losses, the company said Tuesday.
Freddie Mac, chartered by Congress to buy home loans from mortgage lenders, is the nation's No. 2 buyer and guarantor of home loans. It will sell $6 billion of a special class of stock.
The money raised through this sale will be used to buttress the company's balance sheet "in light of actual and anticipated losses," Freddie said in a statement.
The company's board declared a dividend of 25 cents for the fourth quarter, compared with a dividend of 50 cents in the third quarter. The company said it needed the dividend cut — its first since it became a public company in 1989 — to hold on to enough cash to maintain its financial flexibility and satisfy regulators.
In 2004, McLean, Virginia-based Freddie Mac agreed with its regulator, the Office of Federal Housing Enterprise Oversight, to keep a cushion of cash handy to cover potential losses.
The company's book of mortgage contracts lost substantial value during this year's credit turmoil.
The offering of preferred stock and the halving of the dividend were expected after Freddie Mac last week posted its biggest quarterly loss ever — $2 billion in the third quarter — and warned that it may need to curtail its business unless it can raise fresh capital. The loss, due in large part because Freddie needed to set aside $1.2 billion to account for mortgages gone sour, far outstripped what Wall Street was expecting.
If sales of debt, the dividend cut and other actions aren't sufficient to keep the company's capital levels above government-mandated minimums, Freddie Mac said it may consider other measures such as limiting its growth, reducing the size of its mortgage investment holdings or issuing new stock.
The bad news last week sent Freddie Mac's shares skidding 28.7 percent, the largest decline since its shares have traded in public markets.
It also sent a shudder through the mortgage market since Freddie's loss was even larger than the $1.4 billion quarterly deficit of Fannie Mae, its bigger government-sponsored competitor.
Analysts noted that Freddie Mac's holdings of securities backed by high-risk subprime mortgages — the loans targeted to borrowers with tarnished credit records that succumbed to a wave of defaults starting earlier this year — greatly exceed those of Fannie Mae.
The remedies Freddie Mac is undertaking could add to the strain on the slumping housing market, analysts say, an outcome that would be sharply at odds with its government-mandated mission to keep money flowing to lenders.
Fannie Mae and Freddie Mac have traditionally been a key source of funding for banks and other mortgage lenders by purchasing mortgages they originate and then packaging them for sale to investors. Industry experts say a reduced role by either could ripple across the entire housing market.