Published November 03, 2011
WASHINGTON – Government-controlled mortgage giant Freddie Mac has requested $6 billion in additional aid after posting a wider loss in the third quarter.
Freddie Mac said Thursday that it lost $4.4 billion, or $1.86 per share, in the July-September quarter. That compares with a loss of $4.1 billion, or $1.25 a share, in the same quarter of 2010.
This quarter's $6 billion request from taxpayers is the largest since April 2010.
Freddie's losses are increasing mainly for two reasons: Many homeowners are paying less interest because they are able to refinance at lower mortgage rates. And failing and bankrupt mortgage insurers are not paying out as much money when homeowners default.
The government rescued McLean, Va.-based Freddie Mac and sibling company Fannie Mae in September 2008 after massive losses on risky mortgages threatened to topple them. Since then, a federal regulator has controlled their financial decisions.
Taxpayers have spent about $169 billion to rescue Fannie and Freddie, the most expensive bailout of the 2008 financial crisis. The government estimates it could cost up to $51 billion more to support the companies through 2014.
Freddie and Washington-based Fannie own or guarantee about half of all U.S. mortgages, or nearly 31 million home loans worth more than $5 trillion. Along with other federal agencies, they backed nearly 90 percent of new mortgages over the past year.
Charles E. Haldeman Jr., Freddie's chief executive, said many homeowners are refinancing at lower mortgage rates or are shortening the terms of their mortgage. While that saves homeowners money, it is pushing Freddie deeper into the red.
"In fact, borrowers we helped to refinance will save an average of $2,500 in interest payments during the next year," he said.
For Freddie, those losses are temporary because interest rates will remain low for the foreseeable future, said Jim Vogel, an interest-rate specialist at FTN Financial.
Still, many homeowners are still defaulting on their mortgages. Unemployment remains stubbornly high at 9.1 percent. The percentage of those who are late by 90 days or more on their monthly mortgage payments was virtually unchanged at 3.51 percent in the July-September quarter.
Another reason Freddie needs more aid is because it has received less money from mortgage insurers.
Many riskier mortgage loans require insurance, which is meant to protect lenders and investors from losses if a homeowner defaults and the lender doesn't recoup costs through foreclosure. The borrower pays a monthly premium for the insurance, typically a set percentage of the total mortgage loan. But when those mortgage insurers fail, they pay out less in claims.
For example, the main subsidiary of private mortgage insurer PMI Group was seized by Arizona insurance regulators last month. That followed heavy losses the group incurred after the housing market collapsed. PMI is now paying claims at just 50 percent.
As a result, the amount that Freddie has set aside for losses increased from $2 billion in the January-March quarter to $3.6 billion in the July-September quarter.
Fannie and Freddie buy home loans from banks and other lenders, package them into bonds with a guarantee against default, and then sell them to investors around the world. When property values drop, homeowners default -- either because they are unable to afford the payments or because they owe more than the property is worth. Because of the guarantees, Fannie and Freddie must pay for the losses.
Fewer foreclosures and delays in foreclosure processing because of a yearlong government investigation into mortgage lending practices have reduced the companies' projected losses.
Fannie and Freddie are required to pay 10 percent dividends on the government money they receive. Freddie paid $1.6 billion in dividends to the Treasury Department in the July-September quarter.
Pressure continues on the government to eliminate Fannie and Freddie and reduce taxpayers' exposure to risk. The Treasury Department put forward a plan in February to slowly dissolve Fannie and Freddie, although that process could take years. Abolishing Fannie and Freddie would transform how homes are bought and redefine who can afford them.