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Freddie Mac sees $5.5-7.5 billion credit losses

Freddie Mac's CEO estimated the mortgage company will lose an additional $5.5 billion to $7.5 billion over the next few years as the housing crisis worsens and loan defaults rise.
/ Source: The Associated Press

The chief executive of Freddie Mac estimated Tuesday the mortgage finance company will lose an additional $5.5 billion to $7.5 billion over the next few years as the housing crisis worsens and home-loan defaults rise.

The government-sponsored company has already logged about $4.5 billion in projected losses during the first nine months of this year.

“I honestly think it’s going to get tougher before it gets better,” Richard Syron, the company’s chairman and CEO, said in a discussion with financial analysts in New York.

Freddie’s shares fell $2.09, or 6 percent, to $32.95 in morning trading.

While the mortgage crisis has brought a rising wave of foreclosure notices into public view, less evident have been “pictures of people standing with furniture on the lawn” after being forcibly evicted from their homes, Syron said. “As that begins to happen, and it will happen, I am afraid of the impact that this has.”

Syron’s remarks came a day after Freddie Mac and its larger government-sponsored rival Fannie Mae said they are changing their criteria for purchasing delinquent home loans they’ve guaranteed, in order to reduce the number they buy from investors.

On Tuesday, McLean, Va.-based Freddie Mac announced it was imposing a 0.25 percent fee on all new home loans it buys or guarantees with settlement dates starting March 9, matching an earlier move by Fannie Mae. Both companies have begun adding surcharges on loans to borrowers with credit scores below 680 and who are borrowing more than 70 percent of the home’s value.

Fannie and Freddie, which together own or guarantee around two-fifths of U.S. home-mortgage debt, have cut their dividends and sold billions of dollars of special stock recently to buttress their finances after posting stunning third-quarter losses. They have been forced to set aside billions of extra dollars to account for bad home loans, eroding their profits at a time when home prices are falling and defaults are spiking on high-risk mortgages made to borrowers with weak credit histories.

Fannie’s shares declined $1.85, or 5 percent, to $35.06.

The two companies traditionally have been a major source of funding for the home-loan market by buying up mortgages made by banks and other lenders and then bundling them as securities for sale to investors. They have been under pressure to step up their role to help stabilize the mortgage market during the worst housing slump in more than 20 years.

Freddie lost $2 billion in the third quarter, and Syron said Tuesday that results aren’t expected to be any better in the October-December quarter. Fannie’s third-quarter loss was $1.4 billion.

“We’ve reported really ugly numbers, let’s face it,” Syron said in the meeting with analysts.

Freddie late last month sold $6 billion of preferred stock in a special offering to raise capital and sliced its quarterly dividend in half, to 25 cents — its first dividend cut since it became a public company in 1989.