Accounting Changes Hide Freddie's Flaws

Accounting changes at Freddie Mac (FRE Quote) 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. ...