Freddie Mac asks for $13.8b lifeline after suffering record quarterly loss

Business Materials 17 November 2008 02:10 (UTC +04:00)

Freddie Mac, the mortgage financier that was nationalized two months ago, has asked the U.S. government for a $13.8b lifeline after suffering a record $25.3b quarterly loss on large credit related write-downs, TehranTimes reported.

Freddie's decision to tap the $200b facility pledged by the Treasury when it seized the company and its peer, Fannie Mae, will add to the government's bill for rescuing the battered financial sector.

The deepening problems at Fannie and Freddie will raise the political temperature over the government's rising financial commitments to companies that were caught out by the collapse in U.S. house prices.

Fannie reported a $29b quarterly loss this week, asked for financial help from the government and said it might need more than the $100b earmarked for each of the two companies in order to stay in business.

Fannie and Freddie are cornerstones of the U.S. housing market because they own or guarantee about 40 per cent of the $12,000b in outstanding residential mortgages.

Freddie said that the government capital injection was needed because its net worth - the difference between its assets and liabilities - had fallen below zero in the third quarter. The company said that shareholders' equity was a negative $13.8b after $29.4b in write-downs and credit losses during the period.

Freddie wrote down $14.3b of deferred tax assets after realizing that it was unlikely to generate enough income in the short term to take advantage of the tax credits. It had also suffered a $9.1b unrealized loss on its mortgage portfolio and a $6b increase in credit expenses owing to the ""dramatic deterioration in market conditions in the third quarter"".

Freddie said it expected to receive the government money by the end of this month. Fannie and Freddie have to pay a 10 per cent annual dividend on the funds but only after they return to profitability.

The two companies this week announced plans to modify the terms of many of the mortgages they back in an effort to help struggling homeowners keep up with their payments.

In a separate regulatory filing, Freddie warned that it would take away from JPMorgan Chase servicing contracts on mortgages owned by Washington Mutual.

Freddie said it was considering the action because JPMorgan refused to honour promises made by Washington Mutual, which it purchased last month, to buy back bad loans.

JPMorgan declined to comment. People close to the situation said the bank felt it did not have to honor those pledges because it had bought only WaMu's operations out of receivership, not the entire company.