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VOL. 123 | NO. 42 | Friday, February 29, 2008

Freddie's Chief Financial Officer Says the Company has Enough Capital to Make it Through 2008

By MARCY GORDON | AP Business Writer

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WASHINGTON (AP) - Freddie Mac on Thursday said its loss widened to $2.5 billion in the fourth quarter of 2007 as mortgage defaults mounted and falling interest rates hurt certain investments.

Despite expectations of further losses this year and next, the company's chief financial officer said Freddie, the No. 2 U.S. buyer and backer of home loans, will not need to raise additional capital unless "things dramatically deteriorate."

Home prices are dropping across much of the nation, dragging down the broader economy and sending policymakers scrambling for remedies.

Government figures out Thursday show the economy skidded to a near-halt in last year's final quarter. Meanwhile, the number of U.S. homes facing foreclosure soared 57 percent in January from the previous year, and anticipated resets on adjustable-rate loans in May and June threaten to push many more homeowners into default.

The wider-than-expected fourth-quarter loss at Freddie Mac was much larger than Wall Street expected and compares with a loss of $401 million in the same period a year earlier. If not for an accounting change, the company said its fourth-quarter loss would have been $3.7 billion.

A federal regulator announced Wednesday that Freddie and its larger government-sponsored sibling, Fannie Mae, will be allowed to expand their roles in the turbulent mortgage market, through the removal on March 1 of an investment-portfolio cap placed in the aftermath of multibillion-dollar accounting scandals at the companies. Analysts said the impact will be limited, however, because of the large cash cushion the companies must maintain as a reserve against risk.

Fannie reported a loss of nearly $3.6 billion in the October-December quarter.

In a telephone interview, Freddie's chief financial officer, Buddy Piszel, said the company has sufficient capital to get through 2008 thanks to a special stock sale in December that raised $6 billion.

But if conditions worsen significantly in the already turbulent mortgage market, Freddie may have to again tap the public markets, Piszel said. "You can't rule it out," he said.

Piszel also said the company is in an "engaged dialogue" with its regulator, the Office of Federal Housing Enterprise Oversight, on a possible reduction of the mandated 30 percent capital cushion that Fannie and Freddie must maintain.

Freddie's losses have "already eaten through a fair amount of the capital" raised in the stock sale, around $1 billion's worth, said Walter Schmidt, senior vice president at FTN Financial Capital Markets in Chicago.

Analysts see a reasonable chance of the 30 percent cushion being eased so that Fannie and Freddie can pump more money into the turbulent mortgage market. With the companies about to enter the market for home loans over their traditional limit of $417,000 (up to $729,750 in some areas), their need for capital will be amplified.

Meantime, rating agency Moody's Investors Service on Thursday said it may lower its assessment of Fannie's financial strength in light of "sizable" anticipated losses this year that could erode its capital cushion.

Freddie, like Fannie a day earlier, offered a pessimistic outlook for the U.S. housing market. The company said it expects its losses from soured home loans to reach an estimated $2.2 billion this year and $2.9 billion in 2009.

"If the economy weakens substantially from here - a possibility for which we need to be prepared as a company - it will have a further negative effect on homeowners across the country and drive credit costs higher," Freddie Mac's chairman and CEO, Richard Syron, said in a statement.

In addition to having to set aside $912 million in the fourth quarter for soured loans, Freddie said it suffered around $2.3 billion in losses in the value of holdings of derivatives, the complex financial instruments it uses to hedge against swings in interest rates.

Through these investments, known as "interest rate swaps," Fannie and Freddie try to hedge against the risks of rising or falling interest rates. The mortgages on the companies' books tend to rise in value when interest rates drop, and vice versa. But that bet hasn't worked out of late, as interest rates fell in the fourth quarter and the value of mortgages held on the books has fallen as well.

Freddie said the quarterly loss was equivalent to $3.97 a share, steeper than the $2.34-per-share loss expected by analysts polled by Thomson Financial. For all of 2007, Freddie lost $3.1 billion, or $5.37 a share, compared with a profit of $2.3 billion, or $3 a share, in 2006.

Copyright 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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MORTGAGES 141 492 7,092
BUILDING PERMITS 161 1,006 12,591
BANKRUPTCIES 43 259 4,347

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