Mortgage finance giant Freddie Mac, in a sign of continuing woes for the housing and financial markets, reported a much bigger than expected second quarter loss and slashed its dividend on Wednesday.

Freddie lost $821 million, or $1.63 a share, in the quarter. Analysts surveyed by Thomson Reuters had forecast it would trim its loss to 41 cents a share from the 66 cent-a-share loss in the first three months of the year. The company earned $729 million, or 96 cents a share, a year ago.

The company announced it would cut its quarterly dividend to 5 cents a share or less, subject to a final decision by its board, from 25 cents a share in an effort to save capital. Losses have strained Freddie’s capital, and the dividend cut should save the company more than $500 million a year.

Freddie Mac CEO Richard Syron told investors on a conference call that conditions in the housing market will get worse. Freddie expects prices of the homes in its inventory will fall 18% to 20% from their peak, rather than the 15% drop it previously expected.

“Today’s challenging economic environment suggests that the housing market is far from stabilizing,” Syron said. “The long and short of it is that we now think that we are half-way through” the home price decline, he added.

Shares of Freddie plunged 13% in late morning trade. The decline also dragged shares of Fannie Mae, which operates in the same business as Freddie and is set to report quarterly results on Friday, down 11%.

Freddie said its estimated core capital slipped to $37.1 billion at the end of the quarter from $38.3 billion at the end of March. That capital level is about $2.7 billion above the level it agreed to meet with its federal regulator.

Provisions for credit losses more than doubled to $2.5 billion from $1.2 billion in the first quarter. The reason: increases in the delinquency and foreclosure rates of the mortgages Freddie owns and guarantees, as well as the continued declines in home prices.

Those provisions for credit losses caused the company to lose $1.4 billion on the guarantees it makes on loans for single-family homes - about triple the $458 million loss on that line in the first quarter. The company made $129 million on those guarantees in the year-ago period.

The company saw losses soar even though its net interest income, the difference between interest paid and interest income soared to $1.5 billion from $793 million a year ago, due to lower interest costs for the firm in the just completed quarter.

That rise in net interest income was more than offset by the $3.3 billion hit in investment activity due to the reduced estimated value of its holdings. That’s up from a loss of $540 million a year earlier.

About $1 billion of the most recent investment loss was caused by the decline in the value of Freddie’s mortgage securities, which are backed by subprime mortgages or so-called Alt-A home loans made to borrowers who did not provide full or any verification of income or assets.
Central role in mortgage markets

Freddie and Fannie Mae, which were set up by the government to provide funding for the mortgage markets, have become the primary source of capital for banks and other lenders making home loans. They are seen as crucial to the recovery of the housing and credit markets.

But investor anxiety about the firms has driven shares of Freddie down by 66% between June 16 and Tuesday’s close, while Fannie shares lost nearly half their value during the same period. It also prompted Congress to pass a rescue measure for the firms, allowing the Treasury Department to loan them an unlimited amount of cash and even buy their shares if necessary.

Syron was asked Wednesday if Fannie and Freddie, known as government sponsored enterprises or GSE’s, can continue to operate in a way that both helps the housing market and makes the profits that shareholders demand. He said he believes they can continue to serve both missions going forward, despite these losses.

“I don’t think we’re at a point that the model doesn’t work anymore,” he said. “I think we are a point where the model is more stressed.”

“I think virtually everyone, including our critics, would say that this would be an extremely ugly mortgage market if you didn’t have the GSE’s in it,” Syron said.

Credits: CNNMoney.com

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