Freddie Mac posts huge loss

August 6, 2008 5:48:00 PM PDT
Freddie Mac on Wednesday posted a second-quarter loss that was more than three-times larger than Wall Street expected as a huge number of borrowers with good credit fell behind on their exotic and risky mortgages. Stunned investors sent Freddie's stock down more than 19 percent to $6.49.

Freddie's financial losses were concentrated in a handful of states - notably California, Florida, Nevada, and Arizona - where speculation was rampant, prices skyrocketed, and buyers stretched to the financial limit to afford a home.

Freddie is now reeling from loans - made in 2006 and 2007 as the market turned sour - to borrowers with solid credit but little proof of their incomes, or small or no down payments.

These so-called Alt-A loans make up about 10 percent of Freddie's portfolio, but accounted for more than half of the company's credit losses in the quarter.

"(Freddie) bought loans that ... were on some level just as risky as what was subprime," said Ritch Workman, co-owner of Workman Mortgage Co. in Melbourne, Fla.

And the pain is nowhere near over.

Freddie Chief Executive Richard Syron said Wednesday he expects home prices nationwide to fall 18 percent from peak to trough, according to their measure, and that the market is only halfway through the descent.

"We expected credit would continue to deteriorate, and it has, admittedly, even faster than we thought," Syron said.

Freddie lost $821 million, or $1.63 a share, for the quarter that ended June 30, compared with a profit of e bill signed last week by President Bush, the Treasury Department gained unlimited power through 2009 to lend money to Freddie and Fannie or buy their stock if needed.

And the Federal Reserve said it would offer a special lending option to the pair and will take on a new role overseeing the two companies.

Buddy Piszel, Freddie's chief financial officer, said, "We're managing the firm to not have to access the government support."