Mortgage financier Freddie Mac took a step toward issuing common and preferred stock to help bolster its balance sheet Friday when the Securities and Exchange Commission accepted its registration statement filed earlier in the day.
Freddie has committed to raising at least $5.5 billion in capital amid a turbulent time for it and fellow mortgage giant Fannie Mae. The pair have been hit hard over the past year by mounting losses tied to the downturn in the mortgage market, and the government was forced to step in over the weekend to reassure Wall Street of the companies’ solvency.
Washington-based Fannie Mae raised $7.4 billion earlier this year to strengthen its balance sheet. McLean, Va.-based Freddie Mac had indicated plans to raise $5.5 billion, but has been waiting to initiate the offerings because its stock is not yet registered with the SEC.
“We have committed to (the Office of Federal Housing Enterprise Oversight) to raise $5.5 billion of new core capital through one or more offerings, which will include both common and preferred securities,” Freddie said in a statement. “The timing, amount and mix of securities to be offered will depend on a variety of factors, including prevailing market conditions, and is subject to approval by our board of directors.”
The company had been exempted from SEC registration due to its status as a government-chartered company. Freddie had voluntarily proposed to register with the SEC in 2002, but that process was put on hold due to a multibillion-dollar accounting scandal that came to light in 2003.
Freddie had to wait until it completed the restatement of financial results to account for the accounting scandal before registering with the SEC. Freddie became up-to-date and current on financial filings earlier this year, paving the way for it to register its stock with the SEC.
The SEC moved quickly to approve the registration Friday afternoon.
Friday’s filing paves the way for the issuance of new stock.
The filing does not guarantee Freddie will issue shares, but Freddie indicated in the filing that was one option it is considering to help improve capital ratios.
Apart from issuing new stock, Freddie said it is considering limiting growth in its portfolio, or reducing the size of the portfolio and lowering its quarterly dividend.
Freddie noted in the filing that managing regulatory capital “may be adversely affected by mortgage and stock market conditions and volatility.”
Freddie added that a stock offering could hinge on current market conditions and be dilutive to current shareholders.
“Our ability to issue additional preferred or common stock will depend, in part, on market conditions, and we may not be able to raise additional capital when needed,” Freddie said in the regulatory filing. “Issuances of new preferred or common equity may be dilutive to existing stockholders and may carry other terms and conditions that could adversely affect the value of the common or preferred stock held by existing stockholders.”
Shares of Freddie plunged nearly 50 percent last week amid speculation the government might step in and take control of the company, which some investors believed could wipe out equity shareholders’ positions even if the company continued to operate. Shares have recovered 7.4 percent since the beginning of this week.
On Sunday, Freddie and Fannie received pledges of support from the federal government. The Treasury Department unveiled a plan to help provide larger credit lines for the nation’s two largest purchasers of mortgage debt. The Treasury will also ask Congress to allow it to purchase equity stakes in the pair if necessary.
The Federal Reserve said it would open a special lending option to Freddie and Fannie to provide further lending support.
Fannie and Freddie hold or back $5.3 trillion of mortgage debt, about half the outstanding mortgages in the United States.
Analysts widely agree the sustainability of Freddie and Fannie is vital to helping prevent the already battered real estate market from getting worse.