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Friday, November 14, 2008

Freddie: $25B loss, taps $14B in Treasury Dollars

NEW YORK ( -- Embattled mortgage finance firm Freddie Mac reported Friday a $25 billion quarterly loss that will force it to start tapping into the $100 billion in taxpayer funds set aside for its bailout.

The loss triggered a $13.8 billion Treasury Department investment in Freddie (FRE, Fortune 500). Treasury will receive preferred shares in the company in return for the capital injection.

Treasury and regulator Federal Home Finance Authority announced on Sept. 7 that they had taken control of Freddie and Fannie Mae (FNM, Fortune 500). The Bush administration took the firms under conservatorship when it became clear that rising losses on bad mortgages would cause them to run out of the money they needed to continue operating.

The two companies still had some capital at that time and did not need to immediately tap into the $100 billion set aside to back each of them up. Friday's announcement is the first major investment of taxpayer cash into the firms during the current crisis.

Freddie's third-quarter loss came to $19.44 a share, far larger than the $1.2 billion, or $2.07 a share it lost in the year-earlier period. Much of that loss came from a $14 billion non-cash charge to writedown the value of tax credits it had built up. Doubts about the ability of the company to make money in the future and utilize those tax credits caused that charge.

It also took a $9 billion charge to write down the value of securities it held on its books.

But even without those charges, the company's performance was significantly worse than in previous quarters. Freddie's losses from credit-related expenses, essentially those on the loans that it backs or owns, soared to $6 billion, compared to $2.8 billion in the second quarter and $1.4 billion in the year-earlier period. Losses from non-interest expense also soared to $1.4 billion.

Freddie Mac's loss comes four days after the much larger Fannie Mae reported a $29 billion loss. Fannie has yet to start drawing on the money from Treasury, although it said it may have to tap into the money soon if losses continue at the current pace in the fourth quarter.

Freddie and Fannie Mae (FNM, Fortune 500), the other mortgage finance giant, were set up by Congress to help spur mortgage lending. While they operated under government charter, they were owned by taxpayers and paid their profits to investors.

The assumption that the federal government would stand behind the firms' debt allowed them to borrow money cheaply. They used that money to buy huge blocks of private mortgages, which were packaged into securities and held by the firms or sold to other investors with guarantees that the mortgage loans would be paid by home owners.

Together the two firms own or back about $5 trillion in home loans, about half of all loans outstanding. But as house prices started to fall, the rates of defaults started to soar. The two firms lost a combined $12 billion in the four quarters leading up to the most recent quarter. To top of page