Tuesday, November 20, 2007

Freddie Mac Posts a $2 Billion Loss


Turmoil in the housing sector continued to reverberate today across several parts of the industry, reinforcing the mood among investors that the downturn has not yet reached its bottom.

Freddie Mac, the big mortgage finance company, posted a $2 billion loss for the third quarter and warned that it might not have enough capital on hand to cover the mandatory reserves for its mortgage commitments. The company has been battered by a rising wave of foreclosures tied to subprime mortgage defaults and is now “seriously considering” cutting its stock dividend.

Freddie’s misfortune is particularly rattling because the company is considered to be protected by an implied government guarantee. There was no mention in this morning’s earnings release about an infusion of federal capital, though the company said it would seek counsel from Goldman Sachs and Lehman Brothers for its short-term efforts to shore up its reserves.

Shares of the company plummeted 29 percent, to $26.50, its lowest level in 11 years. Shares of its sister firm, Fannie Mae, dropped 25 percent.

“Without doubt, 2007 has been an extremely difficult year for the country’s housing and credit markets,” Richard F. Syron, the chairman and chief executive of Freddie Mac, wrote in a statement.

Mr. Syron was not alone in his lament. D. R. Horton, the nation’s largest home builder, reported a $50.1 million loss in its fiscal fourth quarter as the housing downturn pummeled its inventory, goodwill and land-use contracts. Lower demand and tighter lending standards have cut back the company’s business and caused many clients to cancel contracts.

“We expect the housing environment to remain challenging,” Donald R. Horton, the company’s chairman, said in a statement.

The subprime debacle also claimed another high-profile casualty: H&R Block’s chairman and chief executive, Mark Ernst, who said today he would resign amid the company’s difficulties with subprime exposure. Mr. Ernst had come under fire for the bungled sale of the Option One Mortgage Corporation, a company subsidiary that took heavy losses on risky loans.

His replacement as chairman will be Richard C. Breeden, the former chairman of the Securities and Exchange Commission, who was recently elected to H&R Block’s board after sharply criticizing Mr. Ernst. The chief executive slot will be temporarily filled by Alan M. Bennett, a former top executive at Aetna, the insurance company.

Home building data released today suggested that housing troubles will only worsen. Groundbreaking permits fell 6.6 percent in October to their lowest level in over 14 years, a sign that builders are cutting back on residential home projects. Permits have dipped nearly 25 percent since last October, to a seasonally adjusted 1.18 million annual rate, the Commerce Department said.

New residential construction grew slightly last month, rising 3 percent, to a 1.23 million annual pace. It was the first increase in four months, but the increase came mostly from a 44 percent leap in multifamily homes, like condominiums.

Construction of single-family homes dropped again last month, and over all, housing starts remain near the lowest level since the recession of the early 1990s. “With mortgage financing further constrained and inventories of unsold homes quite high, the near to medium term outlook for housing starts is not good,” Joshua Shapiro, chief United States economist for MFR, wrote in a research note.

That would be unfortunate for Freddie Mac, whose mortgage-related securities rapidly lost their value as the subprime market began to collapse. The company was forced to write down about $2.7 billion in assets related to credit guarantees and derivatives. Freddie lost $3.29 a share in the third quarter, compared with a loss of $1.17 a share a year earlier. The company also said it did not expect earnings to improve in the fourth quarter.

“We’re not happy about this,” Mr. Syron told investors and shareholders on a conference call today. “We don’t expect you to be happy about it.”

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