Freddie Mac seeks to prop up reserves
Freddie Mac, the second-largest provider of financing for U.S. home loans, halved its quarterly dividend and said it would sell $6 billion in preferred stock to bolster capital in anticipation of mortgage-related losses.
The government-chartered firm had foreshadowed the moves to buoy its waning capital base last week when it reported a $2-billion third-quarter loss in the wake of rising defaults on mortgages it owns or guarantees as well as expectations that the housing slump will deepen.
“This is the first step, in my view. They might have to do more,” said Rajiv Setia, a strategist at Barclays Capital in New York. “What this does is really protect them for the next few quarters from any adverse marks to their portfolio.”
Freddie Mac’s board on Monday approved a quarterly common stock dividend of 25 cents a share -- down 50% from the previous quarter -- as part of its strategy of maintaining the capital surplus mandated by its federal regulator, the McLean, Va.-based company said.
The capital management plan “will be used to bolster the company’s capital base in light of actual and anticipated losses necessitated by” accounting requirements, Richard Syron, Freddie Mac’s chief executive, said in the statement. That should provide enough capital to operate through the current market environment, he added.
The preferred issue “gives them the capital flexibility to continue to participate in the mortgage market,” said Howard Shapiro, an analyst at Fox-Pitt, Kelton in New York. “But it’s not good news for common shareholders.”
Stress at Freddie Mac and the larger Fannie Mae has stunned investors who see losses as evidence that the mortgage crisis once limited to sub-prime loans has spread to the prime mortgages that make up most of the companies’ businesses. Freddie Mac has invested in sub-prime loans to a greater extent than Fannie Mae, leaving it more exposed as home prices fall and foreclosures rise.
Shares of Freddie Mac fell 2.3% to $25.15 after the close of regular stock trading, when Freddie Mac announced its plans.
Fitch Ratings said it expected to cut its ratings on Freddie Mac’s preferred stock by one notch if the $6-billion sale went through as planned. The preferred stock is now rated “AA-minus,” the fourth-highest rating.