Accounting Changes Hide Freddie's Flaws

Accounting changes at Freddie Mac FRE masked a sharp deterioration in the government-sponsored mortgage giant's portfolio during the first quarter as conditions in the U.S. housing market continue to worsen.

Freddie said Wednesday its first-quarter earnings beat Wall Street expectations, but it also reported that the "fair value" of its net assets fell to negative $5.2 billion at the end of March from $12.6 billion at the end of December. That reflected a drop of nearly $32 billion in value for its mortgage assets and credit guarantees that did not affect the company's net income.

The company, which is viewed by investors as having the implicit backing of the U.S. Treasury, announced it will raise $5.5 billion in fresh capital by selling stock, and its government regulator will lower the amount of surplus capital it's required to hold to protect its balance sheet. Freddie said in March it would not have to raise more capital.

The Office of Federal Housing Enterprise Oversight will lower Freddie's excess-capital requirement to 15% from 20%, with another cut to 10% in store later this year after other steps are taken. Similar news from Freddie's larger counterpart, Fannie Mae FNM, bolstered confidence in the stock market last week despite that company's $2.19 billion first-quarter loss and its announcement that it will raise $6 billion in fresh capital.

Shares of Freddie were recently up $1.86, or 7.5%, to $26.82.

Cramer: 18 Months Till Housing's Healed

The loosening of the regulatory reins on Freddie and Fannie despite dismal earnings performances reflects a sharp reversal in attitudes toward the companies from federal regulators amid the U.S. housing and credit crisis. Before the crisis, regulators were pushing to tighten controls on the two housing giants after they were both caught up in massive accounting scandals in recent years that led to the ouster of their top executives.