Freddie Mac not giving it away

Freddie Mac, the second-biggest source of money for U.S. home loans, plans to sell $6 billion in preferred stock and cut its dividend in half to shore up capital depleted by record mortgage defaults and foreclosures.

The two-part sale will include non-convertible, non- cumulative preferred stock and a “substantially smaller” portion of convertible preferred shares, Freddie Mac said in a statement today. The company will save about $650 million a year by reducing the dividend to 25 cents, Sharon McHale, a spokeswoman, said.

Losses tied to bad loans reduced Freddie Mac’s core capital cushion by two-thirds last quarter, leaving the McLean, Virginia- based company with just $600 million more than the reserve level required by its regulator. Rising foreclosure filings and falling home prices are likely to lead to more losses at Freddie Mac, which owns or guarantees one in five U.S. residential mortgages.

“This isn’t the apex” of problems in the housing market, said Thomas Atteberry, who oversees $2.8 billion in fixed income at First Pacific Advisors LLC in Los Angeles.

The company may be trying to raise capital in “a big chunk” because sales “three to six months from now may happen at worse prices,” he said. Atteberry’s holdings include $550 million in mortgage bonds guaranteed by Freddie Mac and Fannie Mae.

The sale would raise the ratio of preferred stock to regulatory capital to 35 percent from 23.4 percent “and warrant a one-notch downgrade” in current preferred stock rated AA-, Fitch said in a statement today. Fitch “expects to assign an A+” rating to the latest offering.

`Expensive Capital’

Investors will be looking for about an 8.25 percent dividend on the non-convertible shares if they carry a fixed rate, according to Jim Vogel, head of research into debt of government- affiliated issuers at FTN Financial in Memphis, Tennessee.

“It’s going to be expensive capital for them but they just don’t have a choice,” said Andrew Harding, who helps manage $16 billion as chief investment officer for fixed income at Allegiant Asset Management in Cleveland. “Sometimes the rate isn’t as important as getting the loan itself.”

Freddie Mac sold $500 million of preferred shares in September with a fixed dividend rate of 6.55 percent. The shares, issued at $25 each, were trading at about $20 today.

Larger competitor Fannie Mae this month raised $500 million in preferred stock after reporting a third-quarter loss of $1.4 billion. The company is paying a dividend of 7.625 percent.

Slumping Market

The slumping housing market has sapped funds from mortgage lenders, banks and securities firms, some of which are turning to outside sources for cash. Citigroup Inc., the biggest U.S. bank by assets, said yesterday it would receive a $7.5 billion cash infusion from the emirate of Abu Dhabi to replenish capital after record mortgage losses wiped out almost half its market value.

Countrywide Financial Corp., the biggest U.S. mortgage lender, sold $2 billion of preferred stock to Bank of America Corp. in August to bolster its finances amid the housing slump.

Credit-default swaps tied to Freddie Mac’s subordinated bonds fell to 105 basis points after trading earlier today at 120 basis points, according to broker Phoenix Partners Group. A decline signals improvement in investor confidence.

Freddie Mac on Nov. 20 reported a third-quarter net loss of $2.02 billion, or $3.29 a share, three times what some analysts estimated. Freddie Mac that day tumbled 29 percent in New York Stock Exchange composite trading for its biggest decline since it started trading in 1988. The stock rose $1.23 to $25.73 today.

Freddie Mac’s loss prompted Standard & Poor’s and Fitch Ratings to place a “negative” outlook on the company’s subordinated debt and preferred stock.

Ofheo Endorsement

Congress created Freddie Mac and Fannie Mae to increase mortgage financing by buying loans from lenders. The companies profit by holding mortgages and mortgage bonds as investments and by charging a fee to guarantee and package loans as securities. They record losses when defaults rise.

Freddie Mac’s regulator, the Office of Federal Housing Enterprise Oversight, raised the company’s capital requirement by 30 percent after disclosures of $5 billion in accounting errors.

The preferred sale will help address regulatory concerns and accounting standards, and “provide sufficient capital to continue fulfilling our important housing mission through the current market environment,” Chief Executive Officer Richard Syron said in the statement.

There will be more regulation of Freddie Mac, “which makes them a better credit risk,” Harding said. Tougher oversight “would help make the preferreds more attractive.”

Ofheo endorsed the outline of the company’s capital plans when they were announced Nov. 20.

The company’s “announcement of the steps it intends to take reflects prudential actions,” Ofheo Director James Lockhart said in a statement at that time. “These actions should enhance its ability to continue to fulfill its housing finance mission.”