Freddie Mac Loses $821 Million As Fewer Homeowners Can Pay Loans

NEW YORK — Freddie Mac on Wednesday posted a second-quarter loss that was more than three-times larger than Wall Street expected as a huge number of borrowers with good credit fell behind on their exotic and risky mortgages.

Freddie's financial losses were concentrated in a handful of states _ notably California, Florida, Nevada, and Arizona _ where speculation was rampant, prices skyrocketed, and buyers stretched to the financial limit to afford a home.

Freddie is now reeling from loans _ made in 2006 and 2007 as the market turned sour _ to borrowers with solid credit but little proof of their income, or small or no down payments.

These so-called Alt-A loans make up about 10 percent of Freddie's portfolio, but accounted for more than half of the company's credit losses in the quarter.

"(Freddie) bought loans that ... were on some level just as risky as what was subprime," said Ritch Workman, co-owner of Workman Mortgage Co. in Melbourne, Fla.

And the pain is nowhere near over.

Freddie Chief Executive Richard Syron said Wednesday he expects home prices nationwide to fall 18 percent from peak to trough, according to their measure, and that the market is only halfway through the descent.

"We expected credit would continue to deteriorate, and it has, admittedly, even faster than we thought," Syron said.

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Freddie lost $821 million, or $1.63 a share, for the quarter that ended June 30, compared with a profit of $729 million, or 96 cents a share, in the year-ago period.

Revenue fell to $1.69 billion from $2.34 billion.

Stock analysts surveyed by Thomson Financial expected a loss of just 53 cents a share.

The dismal financial results come just weeks after the government threw a financial lifeline to Freddie and its sister company Fannie Mae to ward off fears the pair could collapse and take down the U.S. mortgage market. Together, the two hold or guarantee nearly half of outstanding U.S. mortgage debt.

During the quarter, Freddie set aside $2.5 billion for losses _ more than double what it had reserved in the first quarter.

Freddie's cash cushion against losses also shrank during the quarter, falling to $37.1 billion, or $2.7 billion more than the 20 percent surplus required by its federal regulator. But Syron said the company has "no intention to get down below the minimum capital level."

To try to stem the red ink, Freddie said last week it would increase payments to loan servicers who helped borrowers work out their loan problems and avoid foreclosure.

In a bold move to preserve capital, the government-sponsored company said it expects to cut its dividend this quarter to 5 cents or less a share from 25 cents a share.

The McLean, Va.-based company also said it would raise at least $5.5 billion in capital.

But Paul Miller, an analyst at Friedman, Billings, Ramsey & Co., said Freddie needs to raise about twice that amount to strengthen its financial position, and it "needs to raise capital today, not wait and hope for a chance to raise cheaper capital in the future."

As part of a sweeping housing rescue bill signed last week by President Bush, the Treasury Department gained unlimited power through 2009 to lend money to Freddie and Fannie or buy their stock if needed.

And the Federal Reserve said it would offer a special lending option to the pair and will take on a new role overseeing the two companies.

Buddy Piszel, Freddie's chief financial officer, said, "We're managing the firm to not have to access the government support."

Freddie's stock tumbled more than 19 percent to $6.49. Shares of Fannie Mae, which reports earnings on Friday, slid almost 15 percent to $11.60.

Comments

[RJII]

when is trickle down economics gonna trickle down to me?

[Sundialsvc4]

Quote:
"... the government threw a financial lifeline to Freddie and its sister company Fannie Mae to ward off fears the pair could collapse and take down the U.S. mortgage market. Together, the two hold or guarantee nearly half of outstanding U.S. mortgage debt."

Nope... "The Full Faith And Credit Of The United States(TM)" taketh away the sins of the world.

When someone buys a mortgage, the bank immediately sells it as a Security, which flows quite-anonymously into the "World Where Things Are Valuable Because They Say They Are." This security, with its presumed-value, flows downstream, multiplying "money" with every transaction as it, in turn, becomes "collateral" for a "security," ad-infinitum.

So, who's keeping the whole shell-game running? Exactly: TFFACOTUS(tm). No matter what happens, Uncle Sugar buys you out because their only alternative is to admit that the whole "new economy" is nothing but a Ponzi scheme.

So... eat, drink, and be merry. The government can, and will, "borrow from itself" $821 million THIS MORNING (like every morning) in less than 821 seconds.

This problem will "go away" in less than 14 minutes, as the government "borrows" and issues national debt at the current rate. It will not, cannot ever, stop. "Money for nothing." Really. Will you please pass the wine?

[MetalCanuck]

THis is endorsed by BOTH dems and Repubs btw.

[CaptainHowdy]

Of course it is. Only fools believe that there is any difference between the two parties.

[Zeje]

agree

[Oldtimer]

I saw the value of real estate triple in seven years in Southern California.
How did this happen? Simple.
The dot com boom busted and the American people stopped pouring money into
mutual funds. Where did their money go? Aha! I'll improve my house or buy
another one. Places like Long Beach California were undervalued and soon people
saw real estate as the best way to earn money. I saw home owners buy other houses
simply to remodel, and flip it for a big profit. This drove prices even higher as the construction
sector boomed. Home Depot and Lowe's were loving life. Wall Street saw a run and jumped on
it as mortgage banks, real estate agents and loan writers laughed all the way to the bank.
The boom was encouraged because it propped up the economy. Homeowners took out second mortgages thinking the house was an ATM machine. Then the party got out of control.
Where was the Fed? Where were the regulators?
Maybe Bush will look under the podium where he seached for WMD.
Now it's time to pay the piper and guess what? The losses are forced on the taxpayer.
Privatized profits but socialized losses - all while there are fewer jobs in America that pay enough
to support home ownership. Uh-oh. What's next? Child labor. Mom and Dad are already working like
slaves to pay for the American dream. Looks like little Jonny will have to go to work too.
God bless America.

[outnow]

Bush did this to conceal the true costs of the war and to flip a bag of goodies to the Wall Street sharks. I live in So. Cal, too. Starbucks was the place the mortgage brokers went to phony up the loan applications. No talent persons were able to make small fortunes in real estate. Now they cannot afford to even buy a Latte because they have no other talents. The other shoes are going to fall in the Credit Default Swaps and derivatives. We are in a reverse leverage crisis where assets are going to deflate in value world-wide, and the US led the way.

[UnbiasView]

If I was in trouble I would stop paying too, just hope responsible people will be forced to pick up the tab through government.

[Huffingtonposter231]

The democrats told us they would give us greater fiscal responsibility.....all they have given us is a disaster. Where was their great oversight? Where is their great fiscal responsibility? Where is the balanced budgets? Where is the Medicare fix? Why did they keep earmarks and why are they passing out the pork like their is no tomorrow?

A Republican problem? Just how many decades do the democrats need to be in office before they start giving us this fiscal responsibility they never delivered on? How long do they cry that nothing that happens on their watch is their fault?

[Oldtimer]

You need a hug or an antidote to the kool aid you are overdosing on.

[MetalCanuck]

The Dems are in on the corruption.

[CaptainHowdy]

Yep..

[dadw5boys]

IT TAKES A VOTING MAJORITY TO HAVE OVERSIGHT IF THE REPUBLICANS ARE BLOCKING OVERSIGHT !!!!!!!!!!!!!!!

It take 60 votes to stop the Republican from blocking oversight.

[Razz]

Yes I Love it.
Hope home prices drop sharply.

[EinChicago]

Unless you live in CA, AZ, NV or FL, I wouldn't expect much more. Even teh Case Schiller spindex showed a pretty marked slowdown in house price deflation.

[MetalCanuck]

Homes everywhere are going down.

[CaptainHowdy]

That's because people are unrealistically standing firm on prices. Proof of this, is that sales are way down.

Give it 2-3 of more years... then it will hit bottom.

[raketaka]

This whole mortgage debacle was designed to happen based on our lending procedures. I am sick and tired of reading and/or listening to this garbage about saving Freddie/Fannie's ass because of bad payers.
Banks have several lending rules but curiously they don't reinforce the debt to ratio criteria at all and this is where all the crap happens! We keep on talking about these high risk borrowers but guess what? Everyone knows the definition of a high risk borrower right? So why do banks still lend money to them at a much much higher rate????
At this point, we need to burn the lending system down to the ground and try again. The credit reporting system was designed to justify high interest not to keep high risk borrowers from getting money. There are no high risk borrowers, they become high risk as soon as the lender slams them with 18% rate on a mortgage loan!!! HA!

[dadw5boys]

Freddie Mac and Fannie Mae has the lowest default rates in the whole industry till the Government forced all these bad loans on them from failing and failed bank or investment houses.

This is where ther FBI steps in and put some lenders and property appraiser in jail for collusion to over value the properties so the loans looked better on paper and would sell to investors faster!

[JoeBlough]

Maybe if we could suspend the war for just a month or two, we'd have enough money to make everything solvent.

[fishsandwichesr2good]

Are you suggesting that the US govt should make it a policy to bail out dead beat borrowers? They gambled, they lost. Move on to the next table with a lower ante.

[CaptainHowdy]

The banks INTENTIONALLY loaned money to risky borrowers, knowing that they would either sell the loans to another sucker or get bailed out by the taxpayer.

Idiot.

[RJII]

just remember, no one will be able to move on if property taxes in their state take a big hit. if one major sector crumbles, others will follow. i predict more runs on major banks in the near future.

[netzwerg]

Thats the Republican Way: Privatize profits, Socialize losses...

[heal57]

It's also privatized taxation.

[MetalCanuck]

Oh and the Dems support this.

[ExRepublican]

"Freddie Mac Loses $821 Million As Fewer Homeowners Can Pay Loans"

Serious? This caught me by surprise. I was under the impression that everything was hunky dory. Gosh, what next?

[JoeBlough]

What next? McBush and his economic surge.

[fishsandwichesr2good]

Um no. Let the risk takers default, start renting again, and next time try a smaller first home.

[Superbus]

Any help from the government should come with the proviso that top management salaries are tied into government executive pay rates, say GS-15, etc., not the millions they are currently making since they will be taking taxpayer money.

[RJII]

perfect.

[iambusto]

here is the problem.

I fully support that FRE should just slash the dividend. problem is that generally when a company slashes dividend, its stock drops hook, line and sinker. thats why corporations are very leery of cutting dividends. i say "generally" because in some extraordinary cases, slashing the dividend demonstrates that the corporate stewards are serious about turning the company around.

if FRE had to raise enough capital (through additional equity), maintaining a floor on the stock price is important. can you imagine the amount of dilution that will happen if the stock tanks to say 5$ instead of 15$ and FRE needs additional capital. I am not justifying anything just trying to explain.

but desperate situations call for desperate times. I say slash the dividend.

[BlueZoo]

Are you kidding me? A dividend while declaring almost a TRILLION in losses? If we ran our personal finances like the government does theirs (ours!), we'd ALL be homeless and hungry! Disgraceful!