Freddie Mac Loses $2 Billion in 3Q 2007; More Losses Forecasted; Senator Shumer Worried About Soundness of Federal Home Loan Banking System
On November 20, 2007, Matt Phillips of the Wall Street Journal reported that the Freddie Mac (the Federal Home Loan Mortgage Corp.) reported a third quarter loss of $2 billion. The loss reflects $1.2 billion to cover its guarantees of bad home loans and a $3.6 billion write-down of assets. Freddie Mac, like its sister Fannie Mae, and cousins, the Federal Home Loan Banks, is a government-sponsored corporation established to support home ownership and rental housing. Freddie purchases mortgages and mortgage-related securities, thus priming the credit pump for homebuyers. It also acts as a credit guarantor. It finances purchases primarily by issuing a range of securities in the capital markets. Some observers say that Freddie and Fannie helped fuel the increase in subprime loans associated with the current credit woes.
The losses left Freddie Mac with approximately $34.6 billion, just $600 million more than regulators require. According to the article, Freddie Mac is “seriously considering” cutting its dividend by 50% in the fourth quarter and has hired investment bankers to help it raise capital needed to fund its mortgage investment activities.
In an Associated Press article published in the Atlanta Journal Constitution, also on November 20, it was reported that Freddie Mac’s $3.29 per share loss far exceeded Wall Street analysts expectations of 22 cents per share. This result, along with a recent report by Fannie Mae, has increased investor anxiety over government-sponsored companies, thought by many to have less exposure to high-risk, subprime mortgages, according to the article.
On November 23, James R. Hagerty of the Wall Street Journal reported that nearly all of the subprime mortgage bonds held by Freddie Mac are rated AAA, that Freddie Mac values most of them at above 90 cents on the dollar based on estimates used by the company, and that Freddie Mac may need to write down the value of its subprime mortgage bonds by as much as $5 billion next year. The article further reported that Credit Suisse analysts forecast that Freddie Mac will lose $2.4 billion in the fourth quarter and another $1.1 billion for 2008, not including a possible write-down of assets that would increase the forecasted loss.
Also on November 23rd, Peter A McKay and Lingling Wei of the Wall Street Journal reported that investors searching for a safe haven are bidding up Treasuries and avoiding other investments usually considered as safe, including municipal bonds and government-sponsored enterprises, which would include Freddie Mac, Fannie Mae, and the Federal Home Loan Banks.On November 26th, James Hagerty reported that, as of September 30th, the Federal Home Loan Bank of Atlanta had quietly funneled $51.1 billion to Countrywide Financial Corporation, an increase of 77% from three months earlier, helping it stay in business. Since mid-August, as a result of the subprime-induced credit crisis, Countrywide has been unable to raise capital as it had before through issuance of commercial paper and short-term loans.
News of the FHLB’s loans to Countrywide prompted a letter from Senator Charles Shumer, also reported in the November 26th Wall Street Journal. In that letter, Senator Shumer expressed concern that “these advances may pose a risk to the safety and soundness of the FHLB system as a whole,” and urged regulators to examine risks posed by the marked increase in lending by the FHLB of Atlanta to the nation’s largest independent residential mortgage lender. The advances amounted to 37% of the FHLB’s total advances as of September 30, 2007, far exceeding advances made to the next largest borrower, and Countrywide pledged $62.4 billion of mortgages (78% of its total) as collateral, based on SEC filings, according to Senator Shumer’s letter. “I find these numbers alarming as reports continue to emerge about how Countrywide’s reckless and predatory lending practices were a leading contributor to today’s foreclosure crisis. Moreover, it is my understanding that Countrywide’s loans held for investment at the bank have been far from immune from the credit deterioration that has resulted from unsound lending,” said Senator Shumer.
On November 27th, Karen Talley of the Wall Street Journal reported that UBS downgraded Freddie Mac and Fannie Mae to neutral from buy, citing credit pressures and dividend outlook.
