Housing crisis has Freddie unsteady

The nation’s second-biggest source of mortgage money surprised Wall Street on Tuesday with a huge loss, raising fears that home loans could become harder to get, even for high-quality borrowers.

The revelation by Freddie Mac, one of two government-chartered companies that own or guarantee more than 40% of the country’s residential mortgages, poses another obstacle to the struggling housing market’s recovery, particularly in California.

The company would play a key role in plans offered by congressional Democrats to provide more funding for home loans. One proposal would lift the current $417,000 ceiling on mortgages that Freddie Mac and its sister company Fannie Mae can buy, a move long sought by lenders in states such as California with high home prices.

But that idea, opposed by some Republicans, may be jeopardized by rising losses in the loan portfolios held by Freddie Mac and Fannie Mae, some experts said.

“Their opponents will ask, ‘Why should we give them new powers when they can’t even manage the risks they have?’ ” said Jaret Seiberg, an analyst at Stanford Group in Washington.

On Wall Street, concern about Freddie Mac’s finances in the wake of its loan losses drove its shares down 29%, the biggest one-day drop since the stock began trading in 1988. Fannie Mae’s stock price plunged 25%.

Shares of Calabasas-based mortgage giant Countrywide Financial Corp. also were jolted by Freddie Mac’s disclosure. Countrywide, reeling from losses on dicey home loans made at the peak of the housing frenzy, has staked its future on making less-risky loans that it plans to sell to Freddie Mac and Fannie Mae.

But that strategy could be threatened if Freddie Mac and Fannie Mae scale back on loan purchases. Freddie Mac warned Tuesday that it might have to limit its role in the mortgage market if it can’t shore up its finances.

Any pullback by the two companies would mean “a further exacerbation of the housing downturn -- even less credit available and steeper downturns in home prices,” said Howard Shapiro, an analyst at investment firm Fox-Pitt Kelton Inc. in New York.

In another troublesome report Tuesday, the government said earnings of the nation’s savings and loan institutions plunged 84% to $704 million in the third quarter from a year earlier as the lenders recorded hefty write-offs on bad loans.

Freddie Mac’s report Tuesday that it lost $2 billion in the third quarter is another indication that even some people who were considered good credit risks are struggling to make their mortgage payments as the economy slows and home sales and prices slump.

About 95% of the $2 trillion in home loans owned or guaranteed by the McLean, Va.-based firm are to so-called prime borrowers. Yet the company said the percentage of its single-family loans 90 days or more delinquent rose to 0.51% at the end of the third quarter from 0.4% a year earlier.

Sen. Charles E. Schumer (D-N.Y.), a leading proponent for more federal help to stem rising foreclosures, said Freddie Mac’s troubles bolstered Democrats’ case for government action.

“What is most alarming is that Freddie’s earnings announcement provides confirmation that the foreclosure crisis has officially spilled over into the prime market,” Schumer said in a statement. “This tells us that the worst is yet to come, and the [Bush] administration must act to use all of the tools at its disposal to address the magnitude of this problem.”

Freddie Mac -- whose corporate slogan is “We make home possible” -- said it added $1.2 billion during the quarter to its estimate of future loan losses, about 10 times the amount added in the same period last year.

The company also was forced to write down the value of certain mortgage-related securities it held.

“We don’t believe it would be wise to be sanguine about the near-term housing market,” Richard Syron, the company’s chief executive, said in a conference call with investors.

Although the company said its portfolio was performing better than those of many lenders, it also conceded that it would have to buttress its finances to cope with the worsening housing and mortgage markets.

Freddie Mac said it hired Wall Street investment banks Goldman Sachs & Co. and Lehman Bros. to help it raise capital. To conserve cash, the company also warned that it was “seriously considering” a 50% cut in the dividend it pays its shareholders.

Fannie Mae also struggled in the third quarter, losing $1.4 billion.

Congress created Freddie Mac in 1970 as a sister agency to Fannie Mae, which was born in the Great Depression. The basic idea behind both was to support the housing business: They would borrow by issuing bonds to investors and use the proceeds to buy home loans from banks and S&Ls; -- thereby replenishing lenders’ funds.

The companies also repackage loans and sell them to investors in the form of guaranteed bonds.

The firms eventually shed their government-agency status and became shareholder-owned businesses. But because they can borrow directly from the Treasury in a pinch, investors have long treated them as quasi-governmental entities.

That helped fuel their dramatic growth in the 1980s and 1990s. Fannie Mae, with a loan portfolio of $2.8 trillion, has been the single largest source of mortgage funding, and Freddie Mac has been No. 2.

But in recent years the companies have been tainted by accounting scandals that resulted in the ouster of top management.

The companies also have faced criticism from the Bush administration that they have become dangerously large, and that a serious financial stumble by either firm could shake Wall Street’s foundations.

In a move to rein in the companies, their regulator, the Office of Federal Housing Enterprise Oversight, in mid-2006 placed limits on their ability to expand their loan portfolios.

But as scores of lenders have failed this year because of sub-prime loan losses, Freddie Mac and Fannie Mae, and many Democrats in Congress, have been pressing to raise the cap on total loan holdings to help provide more funding to the housing market. Democrats also want the companies to be able to buy so-called jumbo mortgages.

Schumer warned against overreaction to the companies’ losses. “Given the increasing severity of conditions in the housing market, it should come as no surprise that Fannie and Freddie’s businesses have been negatively impacted,” he said.

The red ink “does nothing to lessen the critical role that the [companies] must play in providing much-needed liquidity to a struggling market. The whole reason Fannie and Freddie exist is to help in times like these,” Schumer said.

The White House, by contrast, has focused its housing-aid efforts on the Federal Housing Administration by expanding the agency’s ability to help troubled borrowers refinance. The White House also has supported the establishment of a nonprofit group, HopeNow, which offers counseling to homeowners facing foreclosure.

However, as the housing crisis has deepened, the Bush administration is weighing whether to support the proposal floated two weeks ago by Federal Reserve Chairman Ben S. Bernanke to temporarily increase the loan limits for Freddie Mac and Fannie Mae to $1 million while permitting the federal government to insure those loans in return for “risk-based” fees.

On Tuesday, Treasury spokeswoman Jennifer Zuccarelli reiterated the administration’s position that “anything that would allow the [companies] to grow needs to be done with comprehensive reform that includes stronger oversight.”

Stanford Group analyst Seiberg said Freddie Mac’s loan losses, and the company’s warning that it must raise fresh capital, could crush any attempt in Congress to give Freddie Mac and Fannie Mae the authority to pump substantial new sums into the mortgage market.

“It makes it that much harder for Democrats to overcome Republican opposition to those ideas,” he said.

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Petruno reported from Los Angeles and Reynolds from Washington. Times staff writers Walter Hamilton in New York and Jonathan Peterson in Washington contributed to this report.