Friday, May 23, 2008

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.

Related Article at Washington Post

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