NEW YORK, NY - Freddie Mac, the second-largest U.S. provider of funding for home loans, will likely need an additional $26 billion in government cash support after taking more losses on commercial and residential mortgage debt, according to Barclays Capital. Increased U.S. capital injections to Freddie Mac and rival lender Fannie Mae make any privatization of the government-controlled companies a more remote possibility, Barclays said.
Deeper losses on risky mortgage securities taken on during the housing boom reduced shareholders' equity at Freddie Mac to negative $40 billion at the end of 2008, compared with negative $14 billion as of September, Barclays analyst Rajiv Setia said in an interview on Wednesday. To boost shareholder equity after a record third-quarter loss, Freddie Mac tapped a $100 billion Treasury lifeline put in place as the government forced it into a conservatorship in September.
Much of that loss was related to write-downs of tax-related assets, but Freddie Mac's fourth-quarter results to be reported in the coming weeks will likely show mortgage bonds drove losses in the latest period, Setia said. Securities losses at Freddie Mac could vary greatly, depending on how the company values the assets, he said. "We saw a really sharp deterioration in non-agency assets" and Freddie Mac has large exposure to multifamily housing, he said. "The big wild card is will they use a generic market price? There is some variability."
Increased demand for taxpayer money by Freddie Mac and Fannie Mae comes as banks and other financial institutions continue to seek government infusions to bolster capital. A second $350 billion installment of the Treasury's Troubled Asset Relief Program (TARP) is expected to be largely directed toward banks.
Securities held by Freddie Mac probably led to $36 billion in pre-tax losses, led by a $19 billion drop from commercial mortgage-backed securities, a Barclays report shows. Subprime and "Alt-A" mortgage securities caused another $12 billion and $5 billion in losses, it said.
CMBS have been pummeled as investors bet the bonds would falter further as the U.S. recession reduces property values and cash flows that support the debt. Risk premiums are near record highs reached in November. Fannie Mae will probably have to tap the government for about $5 billion after reporting fourth-quarter results, Barclays estimated.
Both companies will also post losses related to the loans they guarantee in "agency" mortgage-backed securities, it said. Freddie Mac and Fannie Mae have provisioned for just a third of $45 billion and $80 billion in eventual guarantee losses, respectively, the report showed.
Eventual Treasury injections of about $50 billion each for Fannie Mae and Freddie Mac will likely keep the companies operating as government entities for years, as they struggle to service costs and provide money for U.S. housing, Setia said in a Tuesday conference call.
Before the conservatorships, the companies operated as quasi-government "agencies," where they relied on charters from Congress, but answered to shareholders. "Just given the abject failure of the non-agency markets last year, we have a very hard time seeing a Democratic administration ever letting the guarantee business leave government control," he said on the call.
Source: AllHeadlineNews.com