Freddie Mac, the second-largest U.S. mortgage finance company, on Tuesday posted a wider third-quarter loss and said it may slash its dividend and raise new capital as it works through what it called an extremely difficult year for housing and credit markets.
Freddie shares plummeted 23 percent to an 11-year low after reporting a net loss of $2 billion as falling home prices and tighter credit conditions increased the number of borrowers defaulting on their mortgages.
Freddie said it has hired Goldman Sachs and Lehman Brothers to help it study raising capital in the very near term as its soaring losses force it to raise cash to ensure it has enough capital to meet regulatory requirements. It may also cut its fourth quarter dividend by 50 percent.
If its capital fell below required levels, the company may be forced to reduce the size of its mortgage portfolio.
The gloomy housing market is likely to continue to be a drag on Freddie in the near-term, said Charles Lieberman, chief investment officer of Advisors Capital Management LLC in Paramus, New Jersey, which owns Freddie shares.
I suspect it will continue to worsen in terms of actual defaults, he said.
Freddie's dismal report dragged shares of larger rival Fannie Mae down about 20 percent.
Buddy Piszel, Freddie's chief financial officer, said the housing market will hurt the company's bottom line for some time even though the company mostly deals in low-risk home loans offered to strong borrowers.
Certainly, when housing markets deteriorate, that has an impact. We clearly will incur higher costs with markets being what they are, said Piszel.
The $2 billion loss, or $3.29 a share, compared with a loss of $715 million, or $1.17 a share, in the year-ago period. Wall Street analysts, on average, had expected Freddie Mac to report a third quarter loss of $2.16 per share.
More of Freddie Mac's home loans are heading into foreclosure, which has forced the company to increase its provisions for failing loans. Freddie said Tuesday it had put aside $1.2 billion for credit losses and had begun to increase fees for guaranteeing the payment on home loans.
Freddie also said the value of its net assets decreased by about $8.1 billion in the third quarter.
The cost to insure Freddie's bonds against default rose to a record 65 basis points after its earnings, according to data from Markit which dates from 2004. Freddie Mac and Fannie Mae are chartered by Congress and investors treat them as if they have an implied government guarantee.
Piszel said that fresh capital would be used to maintain a cushion against losses. Freddie also wants the capital to leave it with some flexibility to increase its mortgage investment holdings, he said.
Given where credit is heading, given how we performed in 2007, we believe that we need to raise capital, Piszel said.
The company said in a statement that it might sell preferred stock to increase its capital. Fitch Ratings, however, said it may cut Freddie's AA- preferred stock rating following news it was looking at raising additional capital.
Partly to increase its capital reserves, Freddie sharply shrank its holdings of mortgage securities in October and pushed them further below a growth limit set by the regulator, the Office of Federal Housing Enterprise Oversight.
Freddie Mac's retained mortgage portfolio dropped by an annualized 16.9 percent rate in October to $703.1 billion, after decreasing significantly the previous month.
Freddie shares hit an 11-year low while Fannie Mae shares reached a 12-year trough in early trading. Freddie shares are down 58 percent year-to-date, compared with a 48 percent drop in the KBW Mortgage Finance Index over the same period.