Freddie Shares Tumble on Loss, Dividend Cut

The government-sponsored mortgage giant shed $1.63 a share in the second quarter as its loan portfolio continued to deteriorate.
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Updated from 8:47 a.m. EDT.

Government-sponsored mortgage lender

Freddie Mac

(FRE)

on Wednesday swung to a second-quarter loss more than three times worse than Wall Street expected, as the slumping housing market continued to weigh on the stock.

Chairman and CEO Richard Syron also said Freddie would slash its dividend to "a nickel or less" from 25 cents a share on its common stock in a move to preserve capital. Freddie shares tumbled dramatically, recently trading down nearly 16% at $6.78, but recovering a bit from steeper declines earlier in the day.

Freddie reported a net loss of $821 million, or $1.63 per share, compared to a net profit of $729 million, or 96 cents per share, in the year-ago period. Analysts expected a loss of 41 cents a share, on average, according to Thomson Reuters. The most recent loss comes on top of a first-quarter dent of $151 million, or 66 cents per share.

Freddie increased its provision for credit losses to $2.5 billion, vs. $1.2 billion for the first quarter. Credit-related expenses doubled sequentially to $2.8 billion in the second quarter, due to increasing delinquency rates in its single-family credit guarantee portfolio, more loans transitioned from delinquency to foreclosure and the estimated severity of losses on a per-property basis increased.

The company predicts that home prices related to its loan portfolio will fall 18% to 20% further, vs. an earlier expectation of a 15% decline. Syron expects credit costs to "remain high as the housing market continues to search for a bottom" and estimates that the housing market is about halfway through its decline, but said it is "far from stabilizing."

Chief Business Officer Patricia Cook also warned that "most of the expected losses are yet to be realized," noting that the company has posted only about $2 billion in credit losses since the beginning of 2007.

Freddie tried to assuage investors who have recently fretted about the company's liquidity, noting its estimated regulatory core capital was $37.1 billion at quarter-end, some $8.4 billion more than its statutory minimum capital requirement, and $2.7 billion above the 20% mandatory target capital surplus.

Executives reiterated Freddie's intention to raise $5.5 billion worth of capital during a conference call, saying that even the most severe loss projections indicate that those funds will allow Freddie to stay above statutory minimums through 2009. CFO Buddy Piszell said the company has been working with

JPMorgan Chase

(JPM) - Get Report

and

Goldman Sachs

(GS) - Get Report

to find investors and is "prepared to go as early as today to raise that money."

Management also provided some clarity on why Freddie has dragged its feet on shoring up capital levels, which regulators and shareholders have been pushing for. Syron said that counsel advised the company that it "would not be a good idea" to raise those funds while it was in the midst of

registering with the SEC

.

Piszell added that the company is "not putting a date certain" and that there is "no need for us to rush" to raise capital before "market conditions are appropriate."

Celent Senior Analyst Walter O'Haire says it "will be interesting to see are the terms investors will demand" for taking part in the offering. He noted the likelihood of further declines in the housing market, as well as uncertainty around what role the government will take in overseeing Freddie and sister company,

Fannie Mae

(FNM)

, now that it has outlined a plan to back the entities with billions in taxpayer dollars. The Treasury Department

has hired

Morgan Stanley

(MS) - Get Report

to offer advice.

"The only thing that does appear certain is that investors will seek additional guarantees from Freddie Mac in connection with investing in any future capital raising efforts," O'Haire says.

Some wondered why the company would pay any dividend at all while its capital levels are in danger of being depleted and the market's appetite for new stock is questionable.

"Almost no prudently run private firm would pay out needed funds while losing money at this rate," San Diego State University finance professor Dan Seiver says in an email message. He cynically notes that despite Freddie's "whopping loss," it can "can borrow taxpayer money, get

its liabilities guaranteed by the taxpayers, and still turn around and pay some of it out to

its shareholders."

Syron had come under fire on Tuesday, after

The New York Times

reported he had

ignored warnings signs

that the company was taking on too much risk as early as 2004. In a lengthy, blistering response, Freddie questioned whether Syron had ever seen the memo in question, noted the story's main source left the company "involuntarily" and attributed other anonymous charges made to a "well-worn band of ideologues and self-interested detractors who have opposed the GSE model for years."

Still, after the accounting scandal of 2003 and now that the housing market crisis has revealed that government backing doesn't necessarily equate to a buoy for stock prices, Aite analyst John Jay wonders what equity investors are holding out for.

"I don't know why equity investors were so forgiving," says Jay. "It's not like one quarter, two quarters -- this is going on a decade and it's just getting lazy that Uncle Sam was going to be there."

Jay predicts that investors will have to endure a long, arduous turnaround in the housing market that will come with peaks and dips before share prices meaningfully improve.

Fannie is set to report quarterly results on Friday.