Freddie Mac will issue $6 billion in preferred stock and cut fourth-quarter dividends to shareholders in an effort to maintain mandatory capital surpluses, the mortgage repurchaser said Tuesday.
The announcement came one week after the McLean, Va.-based mortgage repurchaser reported a $2 billion third-quarter loss, and said a requirement that it maintain a 30 percent capital surplus forced it to sell $45 billion in loans in September and October.
In reporting third-quarter earnings, Freddie Mac estimated its core capital at $34.6 billion as of Sept. 30 — just $600 million above the 30 percent capital surplus set by OFHEO.
Freddie Mac officials said at the time they had hired Goldman Sachs & Co. and Lehman Brothers Inc. to advise them on ways to raise additional capital, including limiting the growth or reducing the size of the company’s retained mortgage portfolio, slowing purchases into the credit guarantee portfolio, or issuing preferred or common stock.
The capital raised by issuing $6 billion in noncumulative perpetual preferred stock “will be used to bolster the company’s capital base in light of actual and anticipated losses necessitated by … accounting requirements and help Freddie Mac meet the 30 percent surplus going forward,” the company said in a press release Tuesday.
In a separate announcement, Freddie Mac declared a 25-cents-per-share, fourth-quarter dividend on the corporation’s voting common stock.
The dividend “reflects a 50 percent reduction from the previous quarter as part of the company’s previously stated strategy of managing to its 30 percent mandatory target capital surplus and responding to regulatory concerns, while maintaining the flexibility to effectively manage its business,” the company said.
The 30 percent capital surplus requirement was instituted for Freddie Mac and Fannie Mae by the Office of Federal Housing Enterprise Oversight following management and accounting scandals that forced both companies to restate earnings.
Fannie Mae reported $1.4 billion in third-quarter losses on Nov. 9, but said its core capital at the end of the third quarter was $41.7 billion, or $2.3 billion above OFHEO’s requirements.
According to OFHEO, as of June 30 Fannie and Freddie held $170 billion in AAA-rated, private-label mortgage-backed securities (MBS) backed by subprime mortgages, and have committed to purchase $40 billion in refinanced “rescue” loans made to current subprime borrowers in coming years.