Mortgage giant Freddie Mac said Tuesday that profit fell to $2.1 billion, or $2.75 a share, in 2005, compared with $2.9 billion, or $3.94 a share, in 2004.

The McLean, Va.-based government-sponsored enterprise said the decline was primarily caused by $600 million of costs associated with a settlement of shareholder lawsuits, charges related to Hurricane Katrina and the net impact of certain accounting changes.

In its report, Freddie Mac also said its regulator might limit the growth of its portfolio of home loans.

The mortgage finance company is recovering from $5 billion in accounting mistakes. Freddie Mac has been in hot water since 2003 when it disclosed that it understated net income to minimize earnings volatility.

In 2004, accounting irregularities at Fannie Mae, Freddie’s sister government-sponsored enterprise, were discovered to the tune of some $10.8 billion.

In December 2004, Fannie Mae replaced Franklin Raines, its chairman and CEO, who announced he was taking early retirement, and Fannie Mae’s chief financial officer, Timothy Howard, resigned Dec. 21.

In early February of this year, the Bush administration said Congress should create a new regulator for Fannie Mae and Freddie Mac and direct it to cut the approximately $1.4 trillion investment portfolios held by the government-sponsored enterprises. The bill creating a tougher regulator for the companies is currently stalled in the Senate.

The decline in 2005 income reported by Freddie Mac Tuesday fell below the company’s preliminary estimate of $2.5 billion on March 31.

The release is the first full, detailed report on annual earnings by Freddie Mac since its 2003 disclosures of understatements of net income. The company last year said it would start registering its common stock with the Securities and Exchange Commission after the report.

Freddie Mac’s regulator, the Office of Federal Housing Enterprise Oversight, may require the company to take new remedial steps, Chief Executive Richard Syron said Tuesday. The agency last week announced a limitation to the mortgage portfolio size of Fannie Mae in the wake of accounting mistakes at that company.

Freddie Mac stock was trading at $59.78 this afternoon, down $1.80 a share.

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