Less Red Ink at Freddie in '09 By Nick Timiraos and Michael R. Crittenden Wall Street Journal 02-25-2010

Less Red Ink at Freddie in '09
By Nick Timiraos and Michael R. Crittenden
The Wall Street Journal
February 25, 2010

Freddie Mac posted a smaller loss last year than in 2008 and said for the third consecutive quarter that it won't need to ask the government for additional bailout funds. But the company says conditions could worsen as foreclosures pick up later this year.

The mortgage company posted a net loss of $6.5 billion in the fourth quarter of 2009 and $21.6 billion for the full year, excluding dividends paid to the government. While those losses remain daunting, they are an improvement from 2008, when the company posted a loss of $23.9 billion in the year ago fourth quarter and $50.1 billion for all of 2008.

The improvement came amid early signs of stabilization in the housing market. The company estimated that home prices fell 0.8% last year, versus an 11.7% decline in 2008. Still, Freddie Mac Chief Executive Charles E. Haldeman Jr. warned in a statement that the housing recovery "remains fragile, with significant downside risk posed by high unemployment and a potential large wave of foreclosures."

The statement raises the prospect that the company could need additional funds from the government later this year, especially if home prices were to tumble again or if more borrowers with negative equity lose their jobs and default on their mortgages. The company also said that accounting changes that went into effect earlier this year could trigger additional write-downs.

Freddie's quarterly loss was driven by $7.1 billion in credit expenses related to mortgage defaults, down from $7.9 billion in credit losses during the third quarter. The mortgage-finance giant also wrote down $3.4 billion in low-income tax-credit investments after its federal regulator said the government would not allow the company to sell those investments.

Freddie Mac and its larger rival, Fannie Mae, were taken over by the government through a legal process known as conservatorship nearly 18 months ago. Late last year, the Obama administration said it would cover unlimited losses over the next three years, removing a previous ceiling of $400 billion. Freddie has received about $51 billion in government infusions.

While the companies remain ailing wards of the state, they are playing a critical role in supporting the housing market and are responsible for funding nearly three-quarters of all U.S. home loans. The companies are also responsible for executing the Obama administration's effort to modify and refinance loans for at-risk and troubled homeowners.

Wednesday, Treasury Secretary Timothy Geithner said the administration wouldn't unveil a detailed plan for the future of the companies until next year. The administration had initially said it would outline its plans for the companies when it released its budget proposal earlier this month.

"We want to make sure that we are proposing these changes at a time when we have a little bit more distance from the worst housing crisis in generations," Mr. Geithner said.

The ultimate goal will be to design a system "where the government is playing a less risky, but more constructive role in supporting housing markets," he said. "That's going to be a difficult set of reforms."

Federal Reserve Chairman Ben Bernanke, meanwhile, said the U.S. central bank wouldn't support a return to the model before conservatorship, where the companies enjoyed an implied government debt guarantee that lowered their borrowing costs. "I think there are alternatives...which would be a more stable long-term solution, including either a privatization approach with government guarantees or a public-utility approach," he said.

"The sooner you get some clarity about where the ultimate objective is, the better," he said.

Freddie said that nearly 4% of all loans it owns or guarantees were 90 days or more delinquent at the end of December. The delinquency rate was much higher, at nearly 10.5%, on loans it backed in 2007, as the housing market downturn accelerated.

Freddie said in filings that efforts to modify loans had slowed down the process of foreclosing on homes and that it expected an uptick in foreclosure activity later this year as more borrowers are turned down for loan modifications or re-default.

Analysts said those efforts to delay foreclosures had also made it too difficult to judge whether the worst had passed for the housing-finance giants. "Until Fannie and Freddie actually start liquidating homes themselves, you're dealing with a canvass that's missing a bunch of paint," said Jim Vogel, an analyst at FTN Financial.

While Freddie has over $100 billion in non-performing assets, it has just $33.9 billion in loan-loss reserves. "They're under-reserving," says Paul Miller, an analyst at FBR Capital Markets. He estimates that because losses on those non-performing assets will exhaust the reserves, Freddie has simply postponed larger write-downs it will eventually have to take.

Fannie Mae, which hasn't reported fourth-quarter earnings yet, has required a $60 billion bailout so far. Fannie said on Wednesday it expected that number to grow because it, too, won't be allowed to sell low-income tax-credit investments, which don't have any value to Fannie but could lead to a net loss in tax revenues for the government if they are sold. The company said it will be forced to take a $5 billion loss as a result.