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August 6th, 2008

Freddie’s Losses – Nothing New

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Freddie Mac CEO Richard Syron said the GSE still plans on raising $5.5 billion in new capital, despite posting a second-quarter loss of $821 million. After Freddie reported losses of $4.6 billion in the past three quarters, and foreclosures on Freddie’s properties rose 20% in the second quarter of 2008, its stocks have dropped 76% this year on the New York Stock Exchange. Losses for Freddie Mac are nothing new; the second-quarter loss represents the fifth drop in the past six quarters.

It will be increasingly difficult for Freddie Mac to raise sufficient capital if it continues to lose money on a consistent basis. If the company cannot raise sufficient capital, its borrowing costs will rise, forcing profits to dwindle. Of course, this is part of the reason Treasury Secretary Henry Paulson set up a backstop plan to prevent the fall of company which, in part with Fannie Mae, owns and guarantees nearly half of all US mortgages.

Here’s Bloomberg’s take on the situation:

“Home prices have declined and have hurt them, as has the decrease in home sales,” said Credit Suisse Group’s Moshe Orenbuch, the top-ranked analyst covering the company. “What you need for this stuff to work its way through is for homes to get through the foreclosure process and be sold.”

Paulson last month received authority for his plan to buy unlimited equity stakes in the companies and extend them financing if needed to help bolster confidence in the companies. The Federal Reserve was also given permission to lend directly to Fannie and Freddie.

If Freddie continues to struggle it will put added strain on the market, and could result in a rise in mortgage rates. The ongoing housing crisis has severely crimped the supply line from the nation’s largest mortgage buyers to the nation’s smallest borrowers.

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About the HSH Blog

HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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