Government-chartered mortgage financier Freddie Mac posted an $821 million net loss in the second quarter, bringing losses for the last 12 months to nearly $1.6 billion.
The news raised concerns that the company will have to raise more capital than the $5.5 billion it pledged to raise in May, which could restrict future purchases of mortgages. The company announced it will cut common stock dividends from 25 cents to 5 cents per share, but announced no timetable for raising new capital by issuing stock and securities.
In a regulatory filing, the company also revealed that it’s picked up the pace of loan modifications and short sales, but that its inventory of foreclosed homes is still growing at a rapid pace, especially in California.
Freddie Mac executives say that as of June 30, the company’s $37.1 billion in core capital represented a $2.7 billion surplus over minimum requirements set by federal regulators, which are 20 percent higher than statutory minimums set by Congress.
Freddie Mac said it boosted its mortgage portfolio — mortgage-backed securities it holds for investment — by 9.8 percent in the first half of the year, to $728 billion. The portfolio includes $212.7 billion in "private-label securities" not issued by Fannie and Freddie, including $85.6 billion in securities backed by subprime loans and $47.6 billion in alt-A loans purchased during the housing boom.
During the second quarter, Freddie Mac recognized $1 billion in impairments related to its investments, which included $826 million in write-downs on its private-label securities.
Freddie is relying on private mortgage insurers for coverage of up to $65 billion in losses on $338 billion of agency-issued mortgage-backed securities it’s holding for investment. Only $17 billion of its private-label securities are insured.
The value of mortgage-related securities partly guaranteed by Freddie Mac grew by 5 percent in the first six months of the year, to $1.82 trillion. Freddie’s guarantee business racked up a $1.4 billion loss during the quarter, as provisions for credit losses on single-family guarantees increased to $2.6 billion. The 90-day delinquency rate on Freddie’s single-family credit guarantee portfolio increased to 93 basis points at the end of June, up from 65 basis points at the end of 2007.
Freddie Mac said it engaged in workouts with 17,415 borrowers during the second quarter, up 39 percent from the same quarter a year ago but down slightly from the 18,281 workouts completed in the first quarter.
Freddie Mac relied less on repayment plans — which some critics say only delay inevitable foreclosures because borrowers must still repay all they owe — and engaged in more short sales and loan modifications, which may involve concessions to the borrower.
Freddie Mac arranged 4,687 loan modifications during the second quarter, up 10 percent from the previous quarter and 115 percent from a year ago, although most involved adding past due amounts to the balance of the loan rather than forgiving debt. Short sales were up 51 percent from the previous quarter, to 1,252, an increase of 136 percent from a year ago.
Freddie Mac was nonetheless acquiring properties through foreclosure at a faster rate than it could dispose of them, despite ramping up sales. At the end of the second quarter, real estate-owned inventory was up 115 percent from a year ago, to 22,029, as Freddie Mac acquired 12,410 properties and sold 8,800. Freddie Mac recognized losses of $183 million on sales of REO properties during the second quarter and $292 million for the first six months of the year.
More than 40 percent of the homes acquired by Freddie Mac during the first six months of the year were purchased with interest-only or alt-A loans, even though those loans comprise only about 9 percent of the company’s single-family mortgage portfolio.
About one of every four homes owned by Freddie Mac at the end of June was in California, which also accounted for 30 percent of the company’s credit losses.
Freddie Mac recently announced that it’s doubling the amounts paid to loan servicers who are able to engage in workouts with borrowers that help them avoid foreclosures. Payments to servicers who close short sales or pre-foreclosure sales have been upped to $2,200, while those who arrange loan modifications will earn $800 and those who draw up approved repayment plans will be paid $500 (see story).
Despite worries about Fannie Mae and Freddie Mac’s financial health, their regulator, the Office of Federal Housing Enterprise Oversight (OFHEO), reduced their excess capital requirements in March and lifted 2 percent annual growth caps on their mortgage portfolios, saying they had made progress in correcting management and accounting problems uncovered in 2003 (see story).
In an attempt to soften the impact of the credit crunch, Congress and the Bush administration also boosted Fannie and Freddie’s loan limits in March, from $417,000 to as much as $729,750 in high-cost areas. Freddie reported doing relatively little business in the new "conforming jumbo" mortgages, a situation that’s not likely to change.
Purchases of jumbo conforming loans amounted to only $471 million in the second quarter, as Freddie saw "increased competition in the mortgage finance market" for that product from FHA, which also had its loan limits boosted.
"Given market conditions and competition especially from FHA, we do not anticipate purchasing material amounts of conforming jumbo product in 2008," Freddie Mac said in its quarterly report to investors.
Under the new housing bill, Fannie, Freddie and FHA will be limited to backing loans of no larger than $625,500 in high-cost areas beginning Jan. 1 (see story).
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