WASHINGTON – Nov. 17, 2008 – Freddie Mac is asking for an initial injection of $13.8 billion in government aid after posting a massive quarterly loss.
The mortgage finance company is making the first request to tap the $200 billion promised by the Treasury Department to keep it and sibling company Fannie Mae afloat after the two were seized by federal regulators in September. Freddie Mac said it expects to receive the money by Nov. 29.
The McLean, Va.-based company posted a loss of $25.3 billion, or $19.44 per share, for the third quarter. The results compare with a loss of $1.2 billion, or $2.07 a share, in the year-ago period.
Analysts were divided about whether Fannie and Freddie’s losses would ultimately exceed the government’s $200 billion pledge. And that may partly depend on the extent to which Fannie and Freddie are used by the government as a tool to ease the foreclosure crisis.
“There is no way that $200 billion will be sufficient, especially as these companies are called on to, frankly, take losses … for the good of society,” said Josh Rosner, managing director of research firm Graham, Fisher & Co.
Others say it’s unlikely that losses will soar so high. “I find it difficult to be believe that it will get that far,” said Credit Suisse interest rate strategist Ira Jersey.
Ever since the government takeover, Fannie Mae and Freddie Mac’s debt has suffered from a lack of confidence among international bond investors. They are concerned about whether or not the U.S. government firmly stands behind the companies’ debt.
Once the government actually injects money, that could help resolve that uncertainty, said Alex Pollock, a fellow at the American Enterprise Institute in Washington.
“It will be a demonstration to the international bond buyers of the government’s true commitment to supporting these companies,” Pollock said.
Fannie and Freddie own or guarantee about half of U.S. mortgage loans. If the companies can pay a reduced premium for their debt sales, that could translate into lower mortgage rates for U.S. consumers.
Freddie Mac’s third quarter loss was mainly due to a $14.3 billion charge to reduce the value of tax assets, but also was driven by $9.1 billion writedown on mortgage securities, and $6 billion in credit losses from soaring mortgage delinquency rates and foreclosures.
Freddie Mac said that rising unemployment rates, tightening credit and deteriorating economic conditions “contributed to a substantial increase in the number of delinquent loans,” including prime loans made to borrowers with strong credit.
“Continuing home price declines and growing unemployment are now affecting behavior by a broader segment of mortgage borrowers,” the company said in a Securities and Exchange Commission filing.
Freddie Mac’s overall delinquency rate rose to 1.22 percent, from 0.9 percent at the end of June, and 0.5 percent a year earlier. The number of foreclosed properties that Freddie Mac holds rose to 28,000, from 22,000 in June.
Freddie Mac also disclosed a dispute with JPMorgan Chase & Co., which purchased failed thrift Washington Mutual in late September. JPMorgan has refused to take back bad loans made by Washington Mutual, Freddie Mac said in the SEC filing. Both Fannie and Freddie reserve the right to return loans that they discover to be fraudulent.
On Monday, Fannie Mae posted $29 billion loss in the third quarter as it took a massive tax-related charge. Fannie Mae said it may have to tap the government’s for help in the coming months.
Both Fannie and Freddie have changed their accounting for their deferred-tax assets, which can emerge from operating losses, and can be used to reduce future tax expenses. Companies must be able to show they will be profitable if they intend to use the tax assets for earnings in later periods.
The companies’ new chief executives, Freddie Mac’s David Moffett and Fannie Mae’s Herbert Allison, were scheduled to testify on Capitol Hill next week, but that hearing was rescheduled until Dec. 9. The House Oversight and Government Reform Committee is examining the causes of the government takeover.
Both companies have been asked to turn over a long list of documents and e-mail messages concerning the risks the companies took in their mortgage investments, accounting, and compensation for the companies’ former CEOs.