Federal regulators say they’ll give Freddie Mac more room to purchase and guarantee mortgages if the company follows through on a plan to raise billions to counter its losses.

Freddie Mac narrowed its first-quarter net loss to $151 million — down from $2.5 billion in the fourth quarter of 2007 — but company officials said they still need to raise $5.5 billion in new capital.

Federal regulators say they’ll give Freddie Mac more room to purchase and guarantee mortgages if the company follows through on a plan to raise billions to counter its losses.

Freddie Mac narrowed its first-quarter net loss to $151 million — down from $2.5 billion in the fourth quarter of 2007 — but company officials said they still need to raise $5.5 billion in new capital.

Freddie Mac was able to trim losses in part because of a change in accounting rules that allowed the company to stop reporting losses on certain credit guarantees that put a $1.3 billion dent in the bottom line during the fourth quarter.

The company saw credit-related expenses — including provisions for credit losses and real estate-owned operations expenses — rise sharply during the first quarter, to $1.4 billion. That compares with $912 million in the fourth quarter.

Charge-offs and real estate-owned operations expenses hit $528 million, up from $236 million in the fourth quarter.

Credit losses rose from 5.4 basis points of the total mortgage portfolio in the fourth quarter to 11.6 basis points. Freddie Mac officials now say they expect total credit losses for 2008 will rise to 16 basis points, up from a previous estimate of 12 basis points.

To maintain capital levels required by regulators, Freddie Mac plans to issue $2.75 billion in common stock and $2.75 billion in nonconvertible preferred securities.

"It’s important to note that we began the year with a larger capital cushion compared to a year earlier, and during the quarter we put that capital to work, providing critically needed liquidity to the market and delivering attractive returns on equity for our business," said Buddy Piszel, chief financial officer, in a statement. "Our plan is to raise new capital that will not only enable us to continue to serve our mission and meet the housing market’s needs in this time of stress, but also to deploy that capital in a way that enhances business flexibility and strengthens our capital position."

Federal regulators announced Wednesday that after the company raises the additional capital, they will reduce mandatory capital surpluses from 20 percent to 15 percent.

On March 19, the Office of Federal Housing Enterprise Oversight gave Freddie Mac and sister company Fannie Mae additional leeway to buy up to $200 billion in mortgages and mortgage-backed securities by relaxing tougher capital requirements put in place in 2004, in the wake of management and accounting scandals (see story).

OFHEO Director James Lockhart said Wednesday that Freddie Mac "continues to make progress in remediating its past problems including eliminating all material weaknesses" and that an additional reduction of capital surplus requirements to 10 percent is anticipated in September.

Fannie and Freddie together purchased or guaranteed three out of four U.S. mortgages during the fourth quarter of 2007, and also racked up $6 billion in losses.

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