Freddie Mac on Wednesday posted a second-quarter loss that was more than three times larger than Wall Street expected as a huge number of borrowers with good credit fell behind on exotic and risky mortgages.
The losses were concentrated in a handful of states – California, Florida, Nevada and Arizona – where home prices shot up the most and are now falling precipitously.
The dismal results come just weeks after the government threw a financial lifeline to Freddie and its sister company, Fannie Mae, to ward off fears the pair could collapse and take down the U.S. mortgage market.
Together, the two hold or guarantee nearly half of outstanding U.S. mortgage debt.
Freddie lost $821 million, or $1.63 a share, for the quarter that ended June 30, compared with a profit of $729 million, or 96 cents a share, in the year-ago period.
Revenue fell to $1.69 billion from $2.34 billion.
Stock analysts surveyed by Thomson Financial expected a loss of just 53 cents a share.
In a troubling sign that mortgage delinquencies and foreclosures are increasing, Freddie Mac set aside $2.5 billion – more than double what it had reserved in the first quarter.
Freddie Mac Chief Financial Officer Buddy Piszel told The Associated Press that the credit problems are emerging mostly in the company's Alt-A portfolio, which contains mortgages with high risk factors such as undocumented borrower income or no down payments.
Alt-A loans make up about 10 percent, or $190 billion, of Freddie's entire portfolio, but accounted for more than half of the company's credit losses in the quarter.
For all of Freddie Mac's loans, the percentage of loans more than three months past due edged up to 0.82 percent from 0.74 percent.
Freddie's cash cushion against losses also shrank during the quarter, falling to $37.1 billion, or $2.7 billion more than the 20 percent surplus required by its federal regulator.
To preserve capital, the government-sponsored company said it expects to cut its dividend this quarter to 5 cents or less a share from 25 cents a share.
The McLean, Va.-based company also said it would sell at least $5.5 billion in stock.
Shares of Freddie were down 92 cents at $7.12 a share in midday trading Wednesday.
As part of a sweeping housing rescue bill signed last week by President Bush, the Treasury Department gained unlimited power through 2009 to lend money to Freddie and Fannie or buy their stock if needed.
Also, the Federal Reserve said it would offer a special lending option to the pair and will take on a new role overseeing the two companies.
Fannie Mae will report its quarterly financial results Friday.