Freddie Feels Mortgage Crisis; $4.8 Billion in Write-offs, Loan Loss Reserves

Freddie Mac today announced its third quarter results, and it’s pretty clear that the troubles in the U.S. housing market have reached well beyond “slump” status into what may now best be described as a crisis. The GSE reported a net loss of $2.02 billion for the quarter, and absorbed both a $1.2 billion provision for credit losses as well as a $3.6 billion charge in mark-to-market activity for its portfolio assets. Earlier estimates had pegged potential losses at up to $5 billion.

From Bloomberg, a sobering dose of reality:

Freddie Mac fell as much as 35 percent, the biggest decline since it went public in 1988, as the second- largest U.S. mortgage company posted a record loss and warned of a possible cut in the dividend and the need for additional capital …

“It’s as bad as it possibly could be,” said Howard Shapiro, an analyst at Fox-Pitt Kelton in New York. Shapiro today downgraded Freddie Mac shares to “sell” from “overweight.”

McLean, Virginia-based Freddie Mac and the larger Washington-based Fannie Mae, two institutions created by Congress to foster American home ownership, lost $41 billion in market value this year. The companies, which own or guarantee 40 percent of the $11.5 trillion U.S. home loan market, will have less money available for new mortgages.

“There is nothing we see right now to be more optimistic,” Chief Financial Officer Anthony Piszel said in an interview. He told analysts on a conference call that the fourth quarter “is not going to be pretty.”

Underscoring its expectations for the fourth quarter, the company included some language that should make every mortgage market participant shudder, from the press statement:

As a result of GAAP losses and in order to manage to the 30 percent mandatory target capital surplus and respond to regulatory concerns, as well as to have the flexibility to effectively manage its business, the company is planning on taking several actions. First, the company has engaged Goldman Sachs and Lehman Brothers as financial advisors to help it consider very near term capital raising alternatives. Second, the company is seriously considering reducing its fourth quarter common stock dividend by 50 percent. If these measures are not sufficient to help the company manage to the 30 percent mandatory target capital surplus, then the company may consider additional measures in the future such as limiting growth or reducing the size of our retained portfolio, slowing purchases into our credit guarantee portfolio, issuing additional preferred or convertible preferred stock and issuing common stock.

At the very least, the execs over at Freddie deserve some kudos for admitting how bad things are — and how much worse they are about to get.