Capital crunch hits Freddie Mac, the nation's second-largest home-loan buyer, sparking fears that the housing slump will intensify.
WASHINGTON - Mortgage market woes just got a lot worse with the disclosure that the nation's second-largest buyer of home loans needs more capital or must retrench.
The warning is rippling through an already battered housing market, and it could become difficult even for borrowers with pristine credit and hefty downpayments to get a home loan. Could Freddie Mac's $2 billion loss last quarter be the tipping point that turns the housing slump into an economic slowdown?
Bigger-than-expected losses at the government-sponsored agency, reported Tuesday, caught an edgy Wall Street off-guard. Shares of Freddie Mac plunged 25.5 percent after it said it must set aside $1.2 billion to account for bad loans, and that it may slash its quarterly dividend of 50 cents per share in half. It was the biggest one-day price decline and would be the company's first dividend cut since becoming a public company in 1989.
The mortgage market shuddered at Freddie's loss, coming just days after a $1.4 billion quarterly deficit was revealed by Fannie Mae, its bigger government-sponsored rival.
"It's going to make it increasingly difficult for Americans to borrow money to buy homes," said Peter Schiff, president of Euro Pacific Capital in Darien, Conn., who has long had a bearish perspective on the housing market. "This is not a subprime problem. This is a mortgage problem."
Will money supply dry up?
Especially troubling to investors is that the remedies Freddie Mac is contemplating would add to the strain on the ravaged housing market, analysts say, a development that is at odds with the company's government mandate to keep money flowing to lenders.
Fannie Mae and Freddie Mac were created to be a key source of funding for the housing market through their purchases of home loans made by banks and other lenders; the loans then are bundled and sold to institutional investors.
Fannie and Freddie "have provided essential liquidity in a time of crisis," Howard Shapiro, a Fox-Pitt, Kelton analyst, wrote in a research note to investors Tuesday. The loss of their role to ensure that mortgage markets are liquid will result in "a further exacerbation of the housing downturn -- even less credit available and steeper downturns in home prices."
Executives of McLean, Va.-based Freddie Mac said Tuesday there is little to be optimistic about in the near term, cautioning investors to brace for more bad news.
"This is a very, very difficult time. This is not happy news," Freddie Mac's chairman and CEO, Richard Syron, said in a conference call with Wall Street analysts.
Financial advice sought
In addition to "seriously considering" a fourth-quarter dividend cut, Freddie Mac said it has hired Goldman Sachs Group Inc. and Lehman Brothers Holdings Inc. as financial advisers to help it explore ways to raise capital.
If dividend cuts and other actions aren't sufficient to keep the company's capital levels above government-mandated minimums, Freddie Mac said it may consider other measures, such as limiting growth, reducing the size of its mortgage investment holdings or issuing new stock.
The company will probably raise capital by selling several billion dollars of preferred stock in the "very near term," the company's chief financial officer, Buddy Piszel, told the Wall Street Journal Tuesday. Analysts said that could amount to $5 billion to $10 billion.
Savings institutions squeezed
The outlook isn't much better elsewhere. In a sobering report Tuesday, the federal Office of Thrift Supervision said third-quarter profits at the nation's 831 savings institutions plunged 84 percent to $704 million, as they set aside millions for anticipated loan losses.
James Lockhart, head of the Office of Federal Housing Enterprise Oversight, which regulates Fannie and Freddie, said Freddie Mac's discussion of its options "reflects prudential actions for the company that are appropriate in light of current market conditions."