Freddie Mac Reports Massive Losses

Freddie Mac, the stalwart government-sponsored entity responsible for mortgage funding and market reporting, has been hit hard by the struggling economy, a recently released report shows.

In the three-month period ending March 31, Freddie Mac lost $151 million, or 66 cents per share. In the first quarter of 2007, Freddie Mac lost $133 million, or 35 cents per share.

While it may seem that the increased loss is significant but not deadly, the bottom line numbers do not reflect the building cost of actual and anticipated losses from defaults, foreclosures, and other credit-related expenses. Freddie Mac reported $1.45 billion of these expenses in the three-month period ending March 31. This represents an increase of more than 50 percent from the previous quarter and more than fivefold from the first quarter of 2007.

Put another way: the estimated asset value of Freddie Mac was $12.6 billion on December 31 of 2007. On March 31 of this year, the estimated asset value plummeted to a negative $5.2 billion. If not for changes in valuation methods, the estimate would have sunk by an additional $4.6 billion.

Freddie Mac is an organization formed by the government to keep credit liquid and mortgage money flowing. The company packages mortgages into securities for sale on the secondary mortgage market, and covers the loan payments if borrowers default. With the booming housing market, Freddie Mac and the other government-sponsored entity, Fannie Mae, were also booming. Accounting scandals at both firms, however, pointed the way for problems with the rest of the housing market and enhanced the damages from the subprime fallout.

Freddie Mac is required to maintain minimum levels of capital as protection against losses, but the government is currently decreasing this amount, counting on the company to help support the struggling market. To raise additional capital, Freddie Mac plans to sell more common and preferred stock, diluting current investor shares and increasing costs to the company, but adding power to Freddie Mac’s ability to meet the housing market’s needs.

Freddie Mac's financial woes are indicative of the housing market and financial services companies’ troubles, with rising loan delinquencies and falling home prices causing massive fallout.

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Fed Makes Last Interest Rate Cut in Series to Stimulate Economy

After seven months of interest rate cuts in a campaign to boost the sagging U.S. economy, the Federal Reserve cut a key interest rate yesterday and signaled this would be the last.

The Fed lowered the federal funds rate, the interest rate banks use when lending to each other, to 2 percent. The goal with this cut is to create lower borrowing costs for adjustable-rate mortgages, credit cards, or business loans, and to offer one more means to prevent the current economic downturn from extending.

In a statement issued with the cut, the Fed indicated this was potentially the last cut in the foreseeable future, but left open the possibility of further cuts if the economy continues to deteriorate. The cut comes at the same time that a new report indicated the economy grew at a small, but better than expected rate in the first quarter. The 0.6 percent annual rate growth, along with fiscal stimulus checks mailing this month, is influencing the Fed's restraint for the time being.

The risks from continued and prolonged interest rate cuts are significant, and important to weigh against the burgeoning economic problems. High inflation, caused by higher prices for food and energy, could raise expectations for future inflation, creating a self-fulfilling prophecy. Continuing to cut the interest rate could weaken the dollar further, and worsen inflation. Plus, continued lowering of rates could undermine the Fed's credibility as an authoritative source for fighting inflation and economic troubles.

Details about the higher prices for food and energy surfaced Thursday. The Commerce Department reported that consumer spending is up 0.4 percent, higher than forecasts. But inflation is responsible for much of this increased spending: without inflation, spending increased by 0.1 percent. The figure for consumer spending is important, as two-thirds of economic activity comes from consumers. Too big of a slowdown could push the country into a recession.

The interest rate cut is another bulwark against deepening economic worries, including the 1.1 percent drop in construction spending in March, a decrease lasting 23 straight months. Unemployment claims rose by 35,000 to 380,000 last week, almost double what economists expected. Unemployment and job losses are also expected to rise in April figures.

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Fed Cuts and Signals Halt

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