Tuesday, November 20, 2007

freddie mac

2nd UPDATE: Freddie Mac 3Q Loss Balloons, May Need Capital

November 20, 2007: 08:56 AM EST

(Updates with more information and interview with CFO)

By John Flowers and Damian Paletta


Freddie Mac (FRE)'s third-quarter net loss sharply widened amid soaring credit losses, and the mortgage financier warned it needs more capital and might have to slash its dividend, amid other possible actions.

The news sent shares sharply lower in pre-market trading, falling to $33 from Monday's close of $37.50.

"We're a large company with a large credit footprint nationally, and when credit markets go where they are going, we're going to reflect that," Freddie Mac chief financial officer Buddy Piszel said in an interview.

The quarter is one of the worst experienced by Freddie Mac in years.

Freddie Mac said its estimated regulatory core capital was just $600 million above regulatory requirements. In order to keep it from falling below that, it has engaged Goldman Sachs Group Inc. (GS) and Lehman Brothers Holdings Inc. ( LEH) to help consider "very near-term capital raising alternatives."

Freddie Mac is also "seriously considering" reducing its fourth-quarter dividend by 50%. If those measures are not sufficient, then the company "may consider additional measures in the future such as limiting growth or reducing the size" its retained portfolio.

This is a departure from comments made by company executives in recent months, as they had urged policy makers to lift growth limits so the company could provide more liquidity to the housing market. Now, Freddie Mac's capital position will likely pour cold water on legislative attempts to lift growth limits on the company and its rival, Fannie Mae.

In the third quarter, Freddie Mac reported a net loss of $2 billion, or $3.29 a share, compared with $715 million, or $1.17 a share a year ago.

The latest quarter's results included credit-loss provisions of $1.2 billion, compared with $112 million a year earlier, and mark-to-market losses of $2.7 billion, compared with $1.5 billion a year ago.

The mean estimates of analysts polled by Thomson Financial were for a loss of 22 cents a share on revenue of $1.33 billion.

Freddie Mac posted negative revenue of $678 million, due toits mark-to-market losses and other losses, compared with year-earlier revenue of $91 million.

"We recognized the challenges facing the mortgage markets, however, and have taken further steps to address them," said Chairman and Chief Executive Richard Syron. "At the same time, as our charter mandates, we have continued to meet our mission by playing a stabilizing role in the markets and supporting our customers."

Syron added, "It will take time for this market to turn around. But as it improves, we are optimistic about Freddie Mac's longer-term prospects. The market shift towards fixed rate originations and improved pricing and credit standards should position us well as the weakness in credit markets begins to improve and we are able to leverage our traditional strengths."

Losses on some credit guarantees - wherein the company promises to repay the interest and principal of a securitized loan if a borrower defaults - amounted to $396 million, compared with $103 million in the prior year. Losses on purchased loans rose to $483 million versus $30 million a year earlier.

Freddie also said the fair value of net assets attributable to common stockholders, before capital transactions, fell about $8.1 billion during the quarter, versus a prior-year increase of approximately $300 million. The reduction was largely due to the credit losses.

But in the near-term, investors and analysts will likely be focused primarily on Freddie Mac's capital position. The Office of Federal Housing Enterprise Oversight has a 30% capital surcharge on the holdings at Freddie Mac and rival Fannie Mae because both companies are recovering from separate accounting problems.

Piszel said it is not clear when the 30% surcharge would be lifted and that the company was "committed to deal with today's reality."

Piszel said that when the 30% surcharge was lifted, "we'll be in a better position."

Still, Piszel said the company was weathering the current market better than many other market participants. He said the firm's delinquency rate was 51 basis points, roughly half of the rate experienced by the overall market. He also said that the firm's charge-offs, which are less than three basis points, is lower than other companies.

"Relative to the overall market, our overall credit condition is much more favorable than other market participants," Piszel said.

Freddie Mac has $105 billion of securities backed by subprime loans, and $52 billion of securities backed by Alt-A loans.

"We are not anticipating any significant cash loss on those holdings," Piszel said. Fitch Places Freddie Mac Rating on Watch
Fitch Ratings Places Freddie Mac's Preferred Stock Rating on Negative Watch
November 20, 2007: 10:08 AM EST

NEW YORK (Associated Press) - Credit rating agency Fitch Ratings said Tuesday it placed mortgage financier Freddie Mac's preferred stock rating on negative watch, after the company said it needs to increase its supply of available capital to meet regulatory demands.

Freddie Mac currently has a preferred stock rating of "AA-," which is considered investment grade. Fitch could cut the rating depending on Freddie Mac's ability to raise capital and improve ratios.

Fitch put the rating on negative watch because of uncertainty surrounding whether Freddie Mac will be able to maintain a surplus of 30 percent required by its regulator, the Office of Federal Housing Enterprise Oversight.

Declining capital ratios could result in higher loss absorption by preferred stock, Freddie Mac said.

Earlier in the day, Freddie Mac said it set aside $1.2 billion in the third quarter to account for rising defaults among mortgages, and posted a quarterly loss of $2 billion.

Fitch affirmed Freddie Mac's long-term issuer default rating of "AAA" as well.

Shares of Freddie Mac fell $10.35, or 27.6 percent, to $27.15 in morning trading. Earlier in the session, shares hit a 52-week low of $24.31. Shares have traded between $36.66 and $69.85 during the past year Freddie Mac scrambles for cash
Finance company's shares plunge on news that it has turned to Wall Street and may cut dividends as losses cut deep into capital.
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See all CNNMoney.com RSS FEEDS (close) By Chris Isidore, CNNMoney.com senior writer
November 20 2007: 11:19 AM EST

Freddie Mac CEO Richard Syron said the fourth quarter "will prove difficult as well."
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Authorities are cracking down on the growing problems of mortgage fraud. CNN's Bill Tucker reports.
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NEW YORK (CNNMoney.com) -- Freddie Mac, a government-sponsored firm designed to help provide financing to the mortgage market, announced Tuesday that it is looking to raise cash itself after a larger-than-expected loss cut its capital close to the bone.

The news whacked the company's shares nearly 25 percent in morning trade.

The firm reported a net loss of $2 billion, or $3.29 a share, in the third quarter, wider than the loss of $715 million, or $1.17 a share, a year earlier.

Analysts surveyed by earnings tracker Thomson First Call had forecast that Freddie would trim losses to 22 cents a share in the period.

The firm also announced an $8.1 billion, or 25 percent drop, in the fair value of its assets - another way it measures its financial performance - and it said it had set aside $1.2 billion to cover credit losses.

But what got the most attention on Wall Street was Freddie's announcement that its capital surplus had fallen by $1.2 billion to only $600 million above a mandatory target set under a consent decree with regulators. Freddie also said it has hired Wall Street firms Goldman Sachs (Charts, Fortune 500) and Lehman Brothers (Charts, Fortune 500) to help it "consider very near term capital-raising alternatives."

Among the alternatives it is looking at to increase its available cash would be to slash its dividend by 50 percent. It also could be forced to limit the growth or reduce the size of its retained portfolio, slow purchases into its credit guarantee portfolio or issue additional preferred or common stock.

While problems in the mortgage markets have been well-known for months, it had been hoped that Freddie Mac (Charts, Fortune 500), which buys securities backed by the safest form of mortgages, would be spared the worst of the problems.

Fannie's fuzzy math
But Tuesday's report shows that the problems appear to be spreading. Freddie said that 0.51 percent of its single-family home loans were 90 days or more delinquent in September, up from 0.42 percent in June.

In a conference call Tuesday, the company did not give specific earnings guidance, but it said that the problems were not going to go away quickly.

"It is likely that the fourth quarter will prove difficult as well," said Chief Executive Richard Syron. "We do not believe it would be wise to be sanguine about the near-term outlook for the housing market. The right thing for us to do now is to take steps to strengthen our capital position."

Longer term, Freddie Mac said, its outlook should be helped by the move by lenders to fixed-rate loans and away from variable-rate loans made to riskier borrowers.

On Nov. 9, the other government-sponsored mortgage finance firm, Fannie Mae (Charts), reported lower earnings that raised questions about its accounting. Shares of Fannie have fallen nearly 25 percent since that report, and Freddie had fallen nearly 15 percent during the same period through the close of trading Monday.

LONDON (MarketWatch) -- U.S. stock futures Tuesday advanced after a miserable session, with rate-cut hopes and Hewlett Packard's upbeat earnings helping to provide some cheer, though news of a possible dividend cut at Freddie Mac and building permits at the lowest level in about 14 years limited upside. See full story.
H-P profit gain boosts shares
NEW YORK (MarketWatch) -- Hewlett-Packard Co. on Monday reported a 28% rise in its fourth-quarter earnings as the computing and printing giant saw growth across all its main business areas, leading to revenue of $28.3 billion. See full story.
Freddie Mac's loss more than doubles; firm may halve dividend
NEW YORK (MarketWatch) -- Freddie Mac's third-quarter loss more than doubled as mortgage prices collapsed and credit tightened, sparking additions to loss provisions and leading to consideration of cutting the company's dividend in half, financial results showed Tuesday. See full story.
Economic Report: U.S. Oct. housing starts rise on apartment sector
WASHINGTON (MarketWatch) - Builders broke ground on new apartments at a faster pace in October, the Commerce Department estimated Tuesday. See full story.
GMAC woes lead Cerberus to quit Northern Rock bid: report
LONDON (MarketWatch) -- Cerberus Capital Management has bailed out of the bidding for Northern Rock, the troubled English mortgage lender, because its mostly held GMAC arm has its own problems with the U.S. resident mortgage market in decay, according to a published report. See full story. Federal Home Loan Mortgage Corporation
From Wikipedia, the free encyclopedia
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Freddie Mac (Federal Home Loan and Mortgage Corporation)
Type Public
Founded 1970
Headquarters McLean, VA
Key people Richard Syron, Chairman & CEO; Eugene McQuade, President & COO
Industry Credit Services
Products Financial Services
Revenue $44.00 billion (2006)
Employees 5,000
Slogan We Make Home Possible
Website www.freddiemac.com

The Federal Home Loan Mortgage Corporation ("FHLMC") NYSE: FRE, commonly known as Freddie Mac, is a government-sponsored enterprise (GSE) sponsored by the United States Government. As a GSE, it is a stockholder-owned corporation authorized to make loans and loan guarantees. It is not backed or funded by the US Government, nor do the securities it issues benefit from any government guarantee or protection.

The FHLMC was created in 1970 to expand the secondary market for mortgages in the United States. Along with other GSEs, Freddie Mac buys mortgages on the secondary market, pools them, and sells them as mortgage-backed securities to investors on the open market.

This secondary mortgage market helps to replenish the supply of lendable money for mortgages and ensures that money continues to be available for new home purchases. The name "Freddie Mac" is a creative acronym-portmanteau of the company's full name that has been adopted officially for ease of identification (see "Companies" below for other examples).

1 History
2 Business
3 Conforming loans
4 Credit rating
5 Investigations
6 New Rules for Purchasing Sub-Prime Loans in the Secondary Market
7 Awards
8 See also
8.1 Companies
9 External links

[edit] History
From 1938 to 1968, the secondary mortgage market in the United States was monopolized by the Federal National Mortgage Association (Fannie Mae), which had up until then been a government agency. In 1968, to help balance the federal budget, part of Fannie Mae was converted into a private corporation. To provide competition in the secondary mortgage market, and to prevent Fannie Mae from continuing to have a monopoly, Congress chartered Freddie Mac as a private corporation to compete in this same market.

[edit] Business
Freddie Mac's primary method for making money is by charging a guarantee fee on loans that they have purchased and securitized into Mortgage-backed security bonds. Investors, or purchasers of Freddie Mac MBS, are willing to let Freddie Mac keep this fee in exchange for assuming the credit risk, that is, Freddie Mac's guarantee that the principal and interest on the underlying loan will be paid back regardless of whether the borrower actually repays.

Freddie Mac securities carry no government guarantee of being repaid. This is explicitly stated in the law that authorizes GSEs, on the securities themselves, and in many public communications issued by Freddie Mac. Despite this, there is a wide misperception that these notes carry some sort of implied government guarantee, and the vast majority of investors believe that the Government would prevent them from defaulting on their debt.

" Principal and interest payments are not guaranteed by and are not debts or obligations of the United States or any federal agency or instrumentality other than Freddie Mac. "

Both Alan Greenspan and Ben Bernanke have spoken publicly in favor of greater regulation of the GSEs, due to the size of their holdings and the widespread misperception that they are government backed. Freddie Mac is currently regulated by the U.S. Department of Housing and Urban Development (HUD) and its Office of Federal Housing Enterprise Oversight (OFHEO). The United States House of Representatives recently passed HR 1427 (Federal Housing Finance Reform Act of 2007) which would consolidate oversight for Freddie, Fannie, and the Federal Home Loan Banks into a single regulator.[1] [2].

[edit] Conforming loans
OFHEO annually sets the limit of the size of a conforming loan based on the October to October changes in mean home price, above which a mortgage is considered a non-conforming jumbo loan. The GSEs are only allowed to buy loans that are conforming, which limits secondary market competition for non-conforming loans. By virtue of the laws of supply and demand, then, it is harder for lenders to sell the non-conforming loans, thus it would cost more to the consumers (typically 1/4 to 1/2 of a percent, but can be more due to credit market conditions). The conforming loan limit is 50 percent higher in high-cost areas such as Alaska, Hawaii, Guam and the US Virgin Islands, and is also higher for 2-4 unit properties on a graduating scale.

[edit] Credit rating
See [3]

Senior Long-Term Debt: AAA Aaa AAA
Short-Term Debt A-1+ Prime-1 F-1+
Subordinated Debt AA- Aa2 AA-
Preferred Stock AA- Aa3 AA- Watch Negative
Risk-To-The-Government AA- Not Applicable Not Applicable
Bank Financial Strength Not Applicable A- Not Applicable

[edit] Investigations
In 2003, the company revealed that it had understated earnings by almost five billion dollars, one of the largest corporate restatements in U.S. history. As a result, it was fined 125 million dollars in November, an amount called "peanuts" by Forbes. [4]

A 200-page report issued by Office of Federal Housing Enterprise Oversight indicated that the company's records were manipulated to meet Wall Street earnings expectations. The firm signed a consent order promising to improve internal controls and corporate governance. [5]

[edit] New Rules for Purchasing Sub-Prime Loans in the Secondary Market
Freddie Mac announced on February 27, 2007 that they will buy subprime adjustable rate mortgages only if the borrowers qualify for the maximum rate of the loan, not just the initial low introductory (known as teaser) rate.

[edit] Awards
Freddie Mac was named one of the 100 Best Companies for Working Mothers in 2004 by Working Mothers magazine.

Freddie Mac was ranked number 50 in Fortune 500's 2007 rankings.



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