Freddie Mac’s big loss is big surprise

Freddie Mac on Wednesday posted a second-quarter loss that was more than three times as large as Wall Street expected as a huge number of borrowers with good credit fell behind on their exotic and risky mortgages.

Stunned investors sent Freddie’s stock down more than 19% to $6.49.

Freddie’s financial losses were concentrated in a handful of states -- notably California, Florida, Nevada and Arizona -- where speculation was rampant, prices skyrocketed, and buyers stretched to the financial limit to afford a home.

Freddie is now reeling from loans -- made in 2006 and 2007 as the market turned sour -- to borrowers with solid credit but little proof of income or small or no down payments.

These so-called alt-A loans make up about 10% of Freddie’s portfolio but accounted for more than half of its credit losses in the quarter.

Freddie bought loans that “were on some level just as risky as what was subprime,” said Ritch Workman, co-owner of Workman Mortgage Co. in Melbourne, Fla.

And the pain is nowhere near over. Freddie Chief Executive Richard F. Syron said Wednesday that he expected home prices nationwide to fall 18% from peak to trough and that the market was only halfway through the descent.

“We expected credit would continue to deteriorate, and it has, admittedly, even faster than we thought,” Syron said.

Freddie lost $821 million, or $1.63 a share, for the quarter that ended June 30, compared with a profit of $729 million, or 96 cents, a year earlier. Revenue fell to $1.69 billion from $2.34 billion.

Stock analysts surveyed by Thomson Financial expected a loss of just 53 cents a share.

The dismal financial results come just weeks after the government threw a financial lifeline to Freddie and its sister company, Fannie Mae, to ward off fears the pair could collapse and take down the mortgage market. Together, the two hold or guarantee nearly half of outstanding U.S. mortgage debt.

During the quarter, Freddie set aside $2.5 billion for losses -- more than double what it reserved in the first quarter.

Freddie’s cash cushion against losses also shrank during the quarter, falling to $37.1 billion, or $2.7 billion more than the 20% surplus required by its federal regulator. But Syron said the company had “no intention to get down below the minimum capital level.”

To try to stem the red ink, Freddie said last week that it would increase payments to loan servicers who helped borrowers work out their loan problems and avoid foreclosure.

In a bold move to preserve capital, the government-sponsored company said it expected to cut its dividend this quarter to 5 cents or less a share from 25 cents.

The McLean, Va.-based company also said it would raise at least $5.5 billion in capital.