Freddie Mac, the second-largest source of US mortgage finance, said on Thursday it would tap an extra US$6 billion from its taxpayer lifeline as the shaky US housing market fueled its worst quarterly loss in more than a year.
The government-owned company said it lost US$4.4 billion in the third quarter, a big increase from a US$2.5 billion loss in the year-ago period.
It was the latest sign of how persistent housing weakness is draining cash from the firm the government rescued in 2008, raising the cost to taxpayers to keep it afloat.
The company warned of further weakness ahead as the pace of foreclosures picks up.
Freddie Mac has already drawn US$72.2 billion in taxpayer funds. It needs extra public money to cover its latest loss plus a US$1.6 billion dividend payment to the US Treasury.
The company and its larger rival, Fannie Mae, were seized by the government at the height of the financial crisis as mortgage losses piled up, threatening their solvency.
Given the crucial role the two play in the US housing finance system, the US Treasury has seen them as too important to fail.
Freddie Mac CEO Charles Haldeman said a weak labor market and fragile economy had made many potential home buyers sit on the sidelines or opt to rent, despite relatively low prices and record-low mortgage rates.
TEPID RECOVERY
“Looking ahead, we expect the tepid recovery to continue to put downward pressure on house prices into early next year,” Haldeman said in a statement.
Freddie Mac and Fannie Mae buy mortgages and repackage them as securities for investors, which they then guarantee — a critical role to keep mortgage funds flowing. Together with the US Federal Housing Administration, the two government-sponsored enterprises provide financing for 90 percent of all new US home loans.
With home prices still off sharply from their 2006 peak, both companies are facing mounting costs from a backlog of repossessed properties on their books. Freddie Mac spent US$221 million in the third quarter to maintain homes that have been foreclosed on, up from US$27 million for the previous quarter.
The US Treasury has offered the two companies an unlimited credit line through next year. Both US President Barack Obama’s administration and Congress want to eventually wind them down.
Fannie Mae, which reports on third quarter earnings later this month, has drawn nearly US$105 billion in taxpayer funds since 2008. The two government-owned companies have returned about US$30 billion to the US Treasury in dividends, leaving their net cost to taxpayers at about US$145 billion.
MORE PROVISIONS
Earnings reports earlier in the year had shown Freddie Mac setting aside less money to cover potential credit losses. This quarter, however, Freddie set aside US$3.6 billion for credit losses from single-family home loans, up from US$2.5 billion in the prior quarter.
The company said it expected it would have to set aside more money going forward to cover potential losses as lenders step up foreclosure activity that had been put on hold as they resolved questions over faulty loan documentation.
Aside from continued weakness in housing, Freddie’s performance in the third quarter reflected a US$4.8 billion loss on derivatives it uses to hedge its exposure to interest rates movements. A year earlier, it faced a derivatives loss of only US$1.1 billion.
The regulator for Freddie Mac and Fannie Mae last week predicted the two firms’ cumulative net costs to US taxpayers will be US$121 billion to US$193 billion through 2014, when future dividend payments are taken into account. A year ago, it had forecast a cost of US$221 billion to US$363 billion for the period through 2013.
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