Freddie Mac losses soar, dividend slashed at least 80%

NEW YORK (CNNMoney.com) -- Mortgage finance giant Freddie Mac, in a sign of continuing woes for the housing and financial markets, reported a much bigger than expected second quarter loss and slashed its dividend on Wednesday.

Freddie (FRE, Fortune 500) lost $821 million, or $1.63 a share, in the quarter. Analysts surveyed by Thomson Reuters had forecast it would trim its loss to 41 cents a share from the 66 cent-a-share loss in the first three months of the year. The company earned $729 million, or 96 cents a share, a year ago.

The company announced it would cut its quarterly dividend to 5 cents a share or less, subject to a final decision by its board, from 25 cents a share in an effort to save capital. Losses have strained Freddie's capital, and the dividend cut should save the company more than $500 million a year.

Shares of Freddie fell about 10% in early pre-market trading on the news.

The company said its estimated core capital slipped to $37.1 billion at the end of the quarter from $38.3 billion at the end of March. That capital level is about $2.7 billion above the level it agreed to meet with its federal regulator.

Provisions for credit losses more than doubled to $2.5 billion from $1.2 billion in the first quarter. The reason: increases in the delinquency and foreclosure rates of the mortgages Freddie owns and guarantees, as well as the continued declines in home prices.

Those provisions for credit losses caused the company to lose $1.4 billion on the guarantees it makes on loans for single-family homes - about triple the $458 million loss on that line in the first quarter. The company made $129 million on those guarantees in the year-ago period.

The company saw losses soar even though its net interest income, the difference between interest paid and interest income soared to $1.5 billion from $793 million a year ago, due to lower interest costs for the firm in the just completed quarter.

That rise in net interest income was more than offset by the $3.3 billion hit in investment activity due to the reduced estimated value of its holdings. That's up from a loss of $540 million a year earlier.

About $1 billion of the most recent investment loss was caused by the decline in the value of Freddie's mortgage securities, which are backed by subprime mortgages or so-called Alt-A home loans made to borrowers who did not provide full or any verification of income or assets.

Freddie and Fannie Mae (FNM, Fortune 500), which were set up by the government to provide funding for the mortgage markets, have become the primary source of capital for banks and other lenders making home loans. They are seen as crucial to the recovery of the housing and credit markets.

But investor anxiety about the firms has driven shares of Freddie down by 66% since June 16, while Fannie shares lost nearly half their value. It also prompted Congress to pass a rescue measure for the firms, allowing the Treasury Department to loan them an unlimited amount of cash and even buy their shares if necessary.

Fannie is set to report its results Friday.