Freddie continues its stunning decline

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Once thought of as a safe haven from the collapse of the subprime mortgage market, Freddie Mac's stock has lost half its value in the past month as mortgage defaults and foreclosures increase.

The McLean company's stock plummeted $2.26, or 11.5 percent, to 17.39 yesterday, reaching a new 52-week low, as Credit Suisse cut its target price from $22 to $16. Credit Suisse said that Freddie Mac's recent earnings report because it "does not include increases for 'future' credit losses, such as reserve increases."

"We would note two major risks to book value besides credit quality and interest rates," analysts at the Swiss financial giant wrote. "Nearly half of Freddie's portfolio [of mortgage securities] has been downgraded or is on watch for downgrade."

Book value is an accounting measure of the difference between assets and liabilities.

The negative report from Credit Suisse, as well as an alarming article on Fannie Mae in financial weekly Barron's yesterday were the latest of many blows to both government-sponsored enterprises (GSEs) as the housing market continues to crumble.

Last month, Freddie Mac reported a net loss of $3.1 billion ($5.37 per share) for last year, compared with a net income of $2.3 billion ($3) for 2006. The company reported a net loss of $2.5 billion ($3.97) in the fourth quarter ended Dec. 31, compared with a net loss of $401 million (73 cents), a year ago.

Yet the biggest danger may be faced by owners of the stocks, according to both Barron's and Credit Suisse. In a crisis, analysts expect that the federal government would bail out the companies and honor their debt and mortgage-guarantee obligations. Company shareholders and management would likely be on their own.

Barron's and Credit Suisse criticized the GSEs' reported book value. Credit Suisse said a tax benefit represents 80 percent of Freddie Mac's book value. But without a certain leve l of profits to be taxed, the benefit is worthless.

Some say Freddie Mac remains in a far better position than other mortgage companies and can weather the storm.

"The credit condition continued to weaken at the company, albeit at a lesser extent than the industry's credit deterioration as a whole," wrote Frederick Cannon, an analyst with Keefe, Bruyette & Woods.

"Freddie Mac's access to the capital markets and its funding advantage, due to implicit government backing, will shield Freddie Mac from experiencing substantial liquidity issues, even in a worst-case economic scenario," an analyst with Friedman Billings Ramsey, an Arlington investment bank.