By James Tyson and Jody Shenn
November 21, 2007 (Update3)
SourceNov. 21 (Bloomberg) -- Freddie Mac, the second-largest U.S. mortgage-finance company, may need to raise as much as $6 billion to bolster its capital amid the worst housing slump in at least 16 years.
The government-chartered company yesterday said it would seek more reserves in a ``large transaction,'' after reporting its biggest quarterly loss. The amount may be $5.5 billion to $6 billion, according to Fox-Pitt Kelton analyst Howard Shapiro. Friedman Billings Ramsey analyst Paul Miller and Gary Gordon, an analyst at Portales Partners LLC in New York, predict $5 billion.
``It's not going to be a small number,'' said Gordon, who is advising investors to refrain from buying more of the company's shares.
Freddie Mac said it may slash its 50-cent-a-share quarterly dividend as rising mortgage losses erode reserves to within $1 billion of the minimum set by regulators. Freddie Mac and the larger Fannie Mae have lost $57 billion in market value since December as home-loan defaults and foreclosures rise to records.
The company may sell preferred stock, which ranks above common shares, said Jim Vogel, head of research into debt of government agencies such as Freddie Mac and Fannie Mae at FTN Financial in Memphis, Tennessee. Vogel said the company may issue $3 billion to $4 billion of the securities.
Freddie Mac ``almost in the immediate future'' will announce its plans, Chief Executive Officer Richard Syron said yesterday on a conference call with analysts and investors. Goldman Sachs Group Inc. and Lehman Brothers Holdings Inc., both of New York, are advising the company.
`Remaining Flexible'
Freddie Mac ``hasn't set a specific amount of capital'' it will raise, spokesman Michael Cosgrove said. ``We're remaining flexible.'' Three years ago, Washington-based Fannie Mae sold $5 billion of the securities after its regulator said the company was ``significantly undercapitalized.''
Freddie Mac tumbled 29 percent yesterday, the biggest decline since its shares started trading in 1988, to $26.74 on the New York Stock Exchange. The shares fell 87 cents, or 3.3 percent, to $25.87 at 9:50 a.m. in New York trading.
Fannie Mae fell 25 percent yesterday and is down 43 percent since Nov. 13, when Fortune magazine said the company's accounting may have masked credit losses. Fannie Mae Chief Financial Officer Stephen Swad said the company's accounting methods are accurate. The shares were down 25 cents, or 0.9 percent, to $28 today.
Freddie Mac and Fannie Mae are among financial institutions seeking to shore up capital as their share prices tumble.
MBIA, Citigroup
Armonk, New York-based MBIA Inc., the largest U.S. bond insurer, last month halted its share buyback after reporting its first ever loss. New York-based Citigroup Inc. also suspended its stock repurchases. Calabasas, California-based mortgage lender Countrywide Financial Corp. sold $2 billion of preferred stock to Bank of America Corp. in August.
Fannie Mae last week raised $500 million from the sale of preferred stock after reporting a third-quarter loss of $1.4 billion.
Rising expenses tied to bad loans reduced Freddie Mac's core capital cushion by two-thirds, leaving the company with just $600 million more than required by its regulator, it said in a statement yesterday. Freddie Mac's regulator has ordered the company to hold more in capital ever since it disclosed accounting mistakes in 2003. Fannie Mae must also hold excess capital because of its own errors.
``Whatever they do, however they structure it, they will have to do a pretty large capital raising,'' said Josh Rosner, managing director at New York-based research firm Graham Fisher & Co. Rosner said the amount may grow to $8 billion.
`Prudential Actions'
The Office of Federal Housing Enterprise Oversight, the companies' regulator, endorsed Freddie Mac's plans to raise cash as ``prudential actions.''
Fannie Mae is paying a dividend rate of 7.625 percent on its most recent sale of preferred stock. The issue is trading down $1 at $24 a share on the potential for increased supply from the companies, Bank of America Corp. analysts said in a report yesterday. Freddie Mac sold $500 million of preferred shares in September with a fixed dividend of 6.55 percent.
Troubles at Freddie Mac and Fannie Mae may leave them with less money to buy new mortgages. The companies, created by Congress to foster American home ownership, own or guarantee 40 percent of the $11.5 trillion U.S. residential mortgage market.
``This is a disaster for the broader mortgage capital markets,'' said Shapiro, who yesterday recommended investors sell the shares. ``To the extent that Fannie Mae and Freddie Mac cannot grow, you are taking even more liquidity out of the markets.''
Freddie Mac's loss prompted Standard & Poor's and Fitch Ratings to place a ``negative'' outlook on the company's subordinated debt and preferred stock.
Ratings Downgrade?
A preferred stock sale ``that would be meaningful to manage their capital comfortably would most likely result in a ratings downgrade,'' Vincent Arscott, a New York-based analyst for Fitch, said yesterday in an interview. ``They don't want to raise just enough, they want to have enough to have a cushion and we think that it will be meaningful enough to move the needle.''
Fitch may consider cutting the AA- rating if the ratio of preferred stock to regulatory core capital rises to 30 percent or more from the current level of 23.4 percent, Arscott said.
For S&P, if Freddie Mac raises preferred stock ``it's not going to be a ratings issue,'' S&P analyst Victoria Wagner said in an interview.
To contact the reporter on this story: James Tyson in Washington at at
jtyson@bloomberg.net ; Jody Shenn in New York at
jshenn@bloomberg.netLast Updated: November 21, 2007 09:54 EST