- Associated Press - Wednesday, November 3, 2010

WASHINGTON (AP) — Mortgage buyer Freddie Mac on Wednesday posted a narrower loss of $4.1 billon in the July-September quarter.

The government-controlled mortgage buyer also asked for an additional $100 million in federal aid, substantially less than the $1.8 billion it sought in the second quarter.

Freddie Mac’s third-quarter loss attributable to common stockholders works out to $1.25 a share. It takes into account $1.6 billion in dividend payments to the government. It compares with a loss of $6.7 billion, or $2.06 a share, in the third quarter of 2009.

The government rescued McLean, Va.-based Freddie Mac and sibling company Fannie Mae nearly two years ago to cover their losses on soured mortgage loans, and it estimates the bailouts will cost taxpayers up to $259 billion.

That’s nearly twice the $133 billion Fannie and Freddie are in line to receive from taxpayers so far and would make theirs the costliest bailout of the financial crisis.

The two mortgage giants have been hit by massive losses on risky mortgages purchased from 2005 through 2008. The companies have tightened their lending standards after those loans started to go bad. Default rates on new loans are far lower.

The housing market remains a big challenge, however.

“As we near the end of 2010, the housing market remains fragile, and has recently come under renewed pressure from slowing economic growth, weaker employment and foreclosure uncertainties,” Freddie Mac CEO Charles Haldeman said in a statement. “We believe that it will be a considerable time until the housing market has a sustained recovery.”

Fannie and Freddie have repaid $14.6 billion as dividends to the Treasury Department.

The small request for aid in the latest quarter was intended to help make up a deficit in Freddie Mac’s net worth, resulting from its third-quarter dividend payment exceeding its income of $1.4 billion.

The company reported its earnings one day after midterm elections in which criticism of the government’s financial bailouts figured prominently in many races.

The earnings also were reported as large lenders are facing allegations that they used flawed foreclosure documents to seize millions of homes, a controversy that could put added scrutiny on Fannie and Freddie.

The two mortgage buyers used some of the same law firms that are accused of processing foreclosure files with flawed documents. They are revoking thousands of foreclosure cases from one Florida law firm which is under investigation for falsifying documents used to complete foreclosures. The companies say they have started transferring the documents to other law firms.

Fannie and Freddie buy up home loans from lenders, bundle them together into securities with a guarantee against default and sell them to investors worldwide. They own or guarantee about half of all U.S. mortgages, or nearly 31 million home loans worth more than $5 trillion. They buy home loans from lenders, package them into bonds with a guarantee against default and sell them to investors.

During the housing boom, Fannie and Freddie faced political pressure to expand homeownership and competitive pressure from Wall Street to back ever-riskier loans. When the market went bust, defaults and foreclosures piled up, and the government had to take them over.

Over the next year, lawmakers plan to review the nation’s mortgage-lending system and consider a potential replacement for Fannie Mae and Freddie Mac. The financial overhaul signed by President Obama in July didn’t address that issue, despite protests from Republicans that it was incomplete without a such a plan.

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