Freddie seeks up to $35 billion from gov’t

Bloomberg

Freddie Mac, the mortgage-finance company under federal control, needs as much as $35 billion more in federal aid, and Fannie Mae may soon ask the U.S. Treasury Department for rescue funds as well.

Freddie, which took $13.8 billion from Treasury in November, said in a securities filing Friday that its fourth-quarter operating losses will again drive its net worth below zero. The McLean, Virginia-based company also said it settled a dispute over Washington Mutual loans with JPMorgan Chase & Co.

The request for funds comes as the Treasury faces increasing demands from U.S. financial companies, including Bank of America and Citigroup, that are coping with the fallout from a slumping housing market and a deep recession that’s driving foreclosures to record levels. Treasury officials pledged in September as much as $100 billion to Fannie and Freddie each to ensure their solvency.

Expecting the worst
"Their losses are going to be much higher than anyone anticipated," said Paul Miller, an analyst with FBR Capital Markets in Arlington, Virginia. "The more and more that people are digging into these portfolios, they’re finding out the more and more these guys were doing subprime and Alt-A loans and classifying them as prime." Alt-A loans were made to borrowers with little or no income verification or to those with credit scores slightly above subprime.

Freddie and Washington-based Fannie are the largest sources of mortgage money in the U.S., owning or guaranteeing a combined $5.2 trillion of the $12 trillion home-loan market.

The companies have posted five consecutive quarters of losses totaling $68.4 billion. The Federal Housing Finance Administration seized their operations in September amid concern from regulators that the government-sponsored enterprises may fail in the worst housing slump since the Great Depression.

A drop in the bucket
Fannie, which hasn’t yet drawn on the Treasury backup funds, said in November that it may do so after it reports fourth-quarter results next month. Fannie also said at that time that $100 billion may not be enough to keep it afloat. Treasury agreed to pump money into the companies if the value of their assets drops below what they owe on their obligations.

"Given that they have $4.5 trillion of risk out there, $100 billion is a drop in the bucket," Miller said. "Given the fact that their risk profile on these loans is greater than they led everyone to believe, greater than $100 billion in losses on each institution would not surprise me."

FHFA Director James Lockhart, who regulates the companies, said in an interview last week that one or both companies may request federal aid after they report fourth-quarter earnings next month.

"They will be reporting numbers in mid-to-late February and, yes, I think everybody would expect that there would be a draw on Treasury," Lockhart said.

Freddie’s settlement with JPMorgan, which took over WaMu’s assets after the thrift collapsed in September, will allow the bank to retain WaMu’s mortgage-servicing contracts, according to the filing. In exchange, JPMorgan will assume WaMu’s obligations to repurchase any bad home loans that the thrift sold to Freddie with "recourse."