Freddie Mac Boosts Reserves For Defaults

Freddie Mac today reported that its quarterly profit fell by nearly half in part because it set aside more money to cover expected losses from defaults on loans.

The giant mortgage funding company's financial results provided another barometer of the deterioration in the housing market.

The amount Freddie Mac added to reserves during the second quarter increased more than fivefold, to $336 million from $63 million during the second quarter of 2006. That brought its total reserves to cover anticipated losses from mortgage defaults to $790 million as of June 30, more than double the $351 million of a year earlier.

"Delinquencies are low, but they're trending upward," chief financial officer Anthony Piszel said.

The McLean company said its profit declined by 45.3 percent, to $764 million ($1.02 per share) during the second quarter from about $1.4 billion ($1.93) in the second quarter of 2006. Revenue rose 4.8 percent to about $2.3 billion from about $2.2 billion. The second quarter ended before the worst of the recent upheaval hit the mortgage markets.

Freddie Mac Chairman and CEO Richard Syron

Freddie Mac chairman and chief executive Richard F. Syron said that, though he was an early bear about the outlook for real estate, he wasn't bearish enough.

But, in a conference call with investment analysts, Syron added that the most negative forecasts he has been hearing are too severe, partly because growth in the number of households will bolster demand for homes.

Chartered by the government to keep funds flowing to mortgage lenders, Freddie Mac and its rival Fannie Mae package mortgages into securities that investors can buy and sell. The companies promise to pay investors the principal and interest due if the borrowers default.

Freddie Mac said the cost of making good on its promise was expected to rise as loans were moving faster from delinquency to foreclosure and as real estate markets cool, affecting the amount of money the company can recoup after foreclosing.

In afternoon trading, Freddie's stock price was down 4.4 percent.

--David S. Hilzenrath

By Dan Beyers  |  August 30, 2007; 2:30 PM ET  | Category:  Freddie Mac
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