- The Washington Times - Thursday, August 7, 2008

Wall Street expected as a huge number of borrowers with good credit fell behind on their risky mortgages.

In a move to preserve capital, the government-sponsored company said it expects to cut its dividend this quarter to 5 cents or less from 25 cents a share.

Stunned investors sent Freddie’s stock down more than 19 percent to $6.49.

Freddie’s financial losses were concentrated in a handful of states - notably Arizona - where speculation was rampant, prices skyrocketed and buyers stretched to the limit to afford a home.

Freddie is now reeling from loans to borrowers with solid credit but little proof of their incomes, or small or no down payments.

These so-called Alt-A loans make up about 10 percent of Freddie’s portfolio, but accounted for more than half of the company’s credit losses in the quarter.

“[Freddie] bought loans that … were on some level just as risky as what was subprime,” said Ritch Workman, co-owner of Melbourne, Fla.

And the pain is nowhere near over.

Freddie Chief Executive Officer Richard Syron said Wednesday he expects home prices nationwide to fall 18 percent from peak to trough, according to their measure, and that the market is only halfway through the descent.

“We expected credit would continue to deteriorate, and it has, admittedly, even faster than we thought,” Mr. Syron said.

Freddie lost $821 million ($1.63 a share) for the quarter that ended June 30, compared with a profit of $729 million (96 cents) in the same period a year ago.

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.

The dismal results come just weeks after the government threw a financial lifeline to Freddie and sister company U.S. mortgage market. Together, the two hold or guarantee nearly half of outstanding U.S. mortgage debt.

During the quarter, Freddie set aside $2.5 billion for losses - more than double what it had reserved in the first quarter.

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. But Mr. Syron said the company has “no intention to get down below the minimum capital level.”

To try to stem the red ink, Freddie said last week it would increase payments to loan servicers who helped borrowers work out their loan problems and avoid foreclosure.

The McLean, Va., company also said it would raise at least $5.5 billion in capital.

But Friedman, Billings Ramsey & Co., said Freddie needs to raise about twice that amount to strengthen its financial position, and it “needs to raise capital today, not wait and hope for a chance to raise cheaper capital in the future.”

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