Freddie Posts $151 Million Loss in First Quarter, Better than Expected

Freddie Mac (FRE: 4.54 -14.02%) said Wednesday that it lost $151 million, or $.66/share, during the first quarter of 2008 as it dealt with what it called a “challenging” mortgage and housing market and absorbed $1.4 billion in credit costs. The quarterly loss compares to a $133 million loss, or $.35/share in the year-ago period, and was significantly better than analysts had expected.

MarketWatch reported that analysts had expected a loss of $.91/share for the quarter. Freddie’s first quarter loss compares to a $2.2 billion quarterly loss at sister GSE Fannie Mae (FNM: 6.81 -14.34%), which reported results last week.

“Market and credit conditions remained challenging during the first quarter of 2008,” said Richard F. Syron, Freddie’s chairman and chief executive officer. “This stress is particularly evident in our increased credit-related expenses. However, Freddie Mac on the whole had a better first quarter than what we experienced in the third and fourth quarters of last year.”

Like Fannie Mae, Freddie Mac said it would seek to raise new core capital — $5.5 billion of it — which Syron said the company would use to “serve our mission and build long-term, durable shareholder value.” $2.75 billion of the capital is likely to come in the form of common stock, while another $2.75 billion will consist of a preferred offering; company officials had insisted earlier in the year that a dilutive capital raise wouldn’t be needed. Obviously, that earlier assessment has changed.

The raise of fresh capital will free Freddie, like Fannie before it, from capital restrictions placed on it by the Office of Federal Housing Enterprise Oversight. In a separate statement Wednesday, OFHEO director James Lockhart said the GSE regulator would reduce its capital surcharge on Freddie Mac to 15 percent above statutory minimum capital; a further reduction to a 10 percent surcharge was likely in September, Lockhart said.

Housing Wire reported Tuesday night that a group of Republican Senators, led by Chuck Hagel (R-NE), has questioned OFHEO’s reduction in capital surcharge at Fannie Mae; it’s unclear if similar concerns exist for Freddie Mac.

Freddie Mac’s core capital rose, thanks to an accounting quirk, to $38.3 billion at the end of the quarter, Freddie said; the total is an estimated $6 billion above the OFHEO-directed capital surplus requirement. It’s worth noting that this total is balanced against $738 billion in mortgages held in Freddie’s retained portfolio and $1.8 trillion held in the GSE’s credit guarantee portfolio at the end of April.

Credit quality deteriorates, again
Freddie said it absorbed $1.4 billion in credit loss provisioning and REO operations expense during the first quarter, compared to $912 million for the fourth quarter. Actual credit losses totaled $528 million, more than double the $236 million recorded just one quarter earlier; credit losses translated to an annualized 11.6 basis points of the Freddie Mac’s average total mortgage portfolio.

Freddie Mac said it now expects credit losses to register roughly 16 basis points — or $3.1 billion — relative to its overall mortgage portfolio; the GSE had earlier forecast losses of 12 basis points.

Severe delinquencies 90+ days or more in arrears also continued to increase during the first quarter, Freddie Mac said, reaching 77 basis points of the GSE’s retained portfolio. The first quarter increase amounted to a jump of 18.5 percent relative to fourth quarter’s DQ total.

It’s interesting to note that areas that had been a strong source of fourth quarter losses for Freddie Mac reversed course in the first quarter earnings report, due to the company’s adoption of FAS 157 and FAS 159 — accounting standards that govern so-called “fair value accounting.” Relative to fourth quarter totals, Freddie recorded a $1.05 billion gain in mark-to-market on its trading securities, thanks to FAS 159; it also recorded a gain of $1.3 billion in reduced losses on its credit guarantees, thanks to FAS 157. Those gains clearly enabled Freddie to post a much better first quarter than it otherwise would have.

OFHEO had issued a warning on the use of of fair-value accounting methods ahead of both GSEs’ earnings reports, in April.

For more information, visit http://www.freddiemac.com.