Freddie Mac Is Still Struggling
Wednesday, August 06, 2008SUSIE GHARIB: More grim news from Freddie Mac today, as it reported a huge quarterly loss and drastically cut its dividend. Shares of the mortgage finance giant plunged 19 percent and the decline also dragged down Fannie Mae's stock by almost 15 percent. Fannie reports quarterly results on Friday. Freddie lost $821 million in the second quarter or $1.63 a share, four times wider than estimates. As Stephanie Dhue reports, Freddie's executives warned investors today that the housing market is far from stabilizing.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: Freddie Mac's future is tied to the housing market, a market that its top executives admit is in deep trouble. CEO Richard Syron expects home prices to decline another 10 percent.
RICHARD SYRON, CHAIRMAN & CEO, FREDDIE MAC: We think we're about halfway through this housing cycle, which is certainly the worst housing cycle we've had since the great depression.
DHUE: Along with the loss, Freddie also plans to slash the third quarter dividend from $0.25 a share to a nickel or less. And Freddie repeated its intention to raise $5.5 billion to increase capital, but in an SEC filing said it may not meet capital regulatory requirements. The company expects losses to continue through the end of the year. Analysts see losses continuing into next year. Credit Suisse has an "under perform" rating on the stock. Analyst Moshe Orenbuch says a shortage of capital will outweigh any gains Freddie may make on new mortgage business.
MOSHE ORENBUCH, ANALYST, CREDIT SUISSE: The shortage of capital will do two things. Number one, it will slow the pace of the old business turning into new business and I think it will add more shares and therefore the current owners will probably own a smaller percentage of the company when all is said and done.
DHUE: Freddie Mac and its corporate cousin Fannie Mae will also be shaped by the government's housing rescue law which boosts regulation of the firms. Mike House is a partner at the law firm Hogan and Hartson. He led the lobbying effort for more regulation of the mortgage giants.
MIKE HOUSE, PARTNER, HOGAN & HARTSON: The Congress now is much more involved in this matter. The administration is involved, but more importantly is the Fed and the Treasury are going to be heavily involved as an advisor under the legislation, so their people looking over their shoulder. The main thing we need right now is stability.
DHUE: But it's an open question if Fannie and Freddie will make it through the crisis in their current quasi-public form.
HOUSE: I think you really have to get through the next what I term the next year and a half. The rest of this year and next year to really have any sense of where it's going to be.
DHUE: Before the housing market turned sour, Freddie and Fannie posted returns of better than 20 percent. Analysts say if the firms survive, future returns won't break the single digits. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
