WASHINGTON — Mortgage-market woes just got a lot worse with the disclosure that the nation’s second-largest buyer of home loans needs more capital or must retrench.
The warning is rippling through an already battered housing market, and it could become difficult even for borrowers with pristine credit and hefty downpayments to get a home loan. Could Freddie Mac’s $2 billion loss last quarter be the tipping point that turns the housing slump turn into an economic slowdown?
Bigger-than-expected losses at the government-sponsored agency, reported Tuesday, caught an edgy Wall Street off-guard. Shares of Freddie Mac plunged 25.5 percent after it said it must set aside $1.2 billion to account for bad loans, and that it may slash its quarterly dividend of 50 cents per share in half. It was the biggest one-day price decline and would be the company’s first dividend cut since becoming a public company in 1989.
The $2 billion third-quarter loss for Freddie translates to a $3.29-a-share loss, compared with a gain of $1.17 a share in the third quarter of 2006. Losses far exceeded Wall Street analysts expectations of a 22-cents-per-share deficit, projected in an analysts’ poll by Thomson Financial.
The mortgage market shuddered at Freddie’s loss, coming just days after a $1.4 billion quarterly deficit was revealed by Fannie Mae, its bigger, government-sponsored rival.
“It’s going to make it increasingly difficult for Americans to borrow money to buy homes,” said Peter Schiff, president of Euro Pacific Capital in Darien, Conn., who has long had a bearish perspective on the housing market. “This is not a subprime problem. This is a mortgage problem.”
Especially troubling to investors is that the remedies Freddie Mac is contemplating would add to the strain on the ravaged housing market, analysts say, a development that is at odds with the company’s government mandate to keep money flowing to lenders.
“This is a very, very difficult time. This is not happy news,” Freddie Mac’s chairman and chief executive, Richard Syron, said in a conference call with Wall Street analysts.
In addition to “seriously considering” a fourth-quarter dividend cut, Freddie Mac said it has hired Goldman Sachs and Lehman Brothers as financial advisers to help it explore ways to raise capital.
If dividend cuts and other actions aren’t sufficient to keep the company’s capital levels above government-mandated minimums, Freddie Mac said it may consider other measures, such as limiting growth, reducing the size of its holdings or issuing new stock.
The company likely will raise capital by selling several billion dollars of preferred stock in the “very near term,” the company’s chief financial officer, Buddy Piszel, told The Wall Street Journal Tuesday. Analysts said that could amount to $5 billion to $10 billion.
