Freddie Mac posts $4.1B loss for Q3

By Marcy Gordon
AP Business Writer / November 3, 2010

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WASHINGTON—Government-controlled mortgage buyer Freddie Mac managed a narrower loss of $4.1 billion for the third quarter and asked for an additional $100 million in federal aid -- far less than the $1.8 billion it sought in the second quarter.

But while the slimmer loss, and recent glimmerings such as a slowing rate of new soured loans coming onto Freddie's books, may be positive signs, they don't mean the end of the company's travails, experts say.

"The fact that losses are better is good. But it's not necessarily a forecast for future earnings growth," said Anthony Sanders, a professor of real estate finance at George Mason University in Fairfax, Va. "The problem still remains that we are faced with a deteriorating housing market."

Sanders expects losses to increase for Freddie Mac and sibling company Fannie Mae in the future. "This is a lull in the storm," he said.

And certainly, the results won't silence the mortgage giants' many critics -- especially among Republican lawmakers whose party gained control of the House in Tuesday's midterm elections. Freddie Mac reported its earnings a day after the elections, in which criticism of the government's financial bailouts figured prominently in many races.

Over the next year, lawmakers plan to review the nation's mortgage-lending system and consider a potential replacement for Fannie Mae and Freddie Mac. The financial overhaul signed by President Barack Obama in July didn't address that issue, despite protests from Republicans that it was incomplete without a such a plan.

The government rescued McLean, Va.-based Freddie and Washington-based Fannie nearly two years ago to cover their losses on soured mortgage loans, and it estimates the bailouts will cost taxpayers up to $259 billion.

That's nearly twice the $133 billion Fannie and Freddie are in line to receive from taxpayers so far and would make theirs the costliest bailout of the financial crisis.

The two mortgage giants have been hit by massive losses on risky mortgages purchased from 2005 through 2008. The companies have tightened their lending standards after those loans started to go bad, and default rates on new loans are far lower.

The housing market, however, remains a big challenge.

"As we near the end of 2010, the housing market remains fragile, and has recently come under renewed pressure from slowing economic growth, weaker employment and foreclosure uncertainties," Freddie Mac CEO Charles Haldeman said in a statement. "We believe that it will be a considerable time until the housing market has a sustained recovery."

Freddie Mac's loss attributable to common stockholders for the July-September quarter works out to $1.25 a share. It takes into account $1.6 billion in dividend payments to the government. And it compares with a loss of $6.7 billion, or $2.06 a share, in the third quarter of 2009.

Freddie Mac had $121 billion in bad loans as of Sept. 30, up from $118.7 billion at the end of June and $103.4 billion at the end of last year.

Fannie and Freddie together have repaid $14.6 billion as dividends to the Treasury Department.

The small request for aid in the latest quarter was intended to make up a deficit in Freddie Mac's net worth, resulting from its third-quarter dividend payment exceeding its income of $1.4 billion. Freddie hasn't asked for government money in every quarter; the last three periods of 2009 saw none. At the same time, its $1.8 billion request in the April-June quarter won't necessarily be its last large one.

The size of its requests will depend on adverse factors such as changes in home prices, interest rates and prices of mortgage securities, the company says.

The third-quarter results indicated that the pool of bad loans made from 2005 to 2008 "is still weak but not getting progressively weaker," said Jim Vogel, an analyst for FTN Financial in Memphis.

Freddie's earnings come as large lenders face allegations that they used flawed foreclosure documents to seize millions of homes, a controversy that could put added scrutiny on Fannie and Freddie and bring fresh losses for them.

The two mortgage buyers used some of the same law firms that are accused of processing foreclosure files with flawed documents. They are revoking thousands of foreclosure cases from one Florida law firm which is under investigation for falsifying documents used to complete foreclosures.

Several big banks have been accused of similar conduct. If the banks can't resolve their foreclosure problems and are barred from seizing many homes, Fannie and Freddie could absorb huge losses on loans they own or guarantee. That's because they would no longer be able to recover anything on loans that have gone bad.

Fannie and Freddie buy up home loans from lenders, bundle them together into securities with a guarantee against default and sell them to investors worldwide. They own or guarantee about half of all U.S. mortgages, or nearly 31 million home loans worth more than $5 trillion. They buy home loans from lenders, package them into bonds with a guarantee against default and sell them to investors.