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Strategies & Market Trends : The Residential Real Estate Crash Index -- Ignore unavailable to you. Want to Upgrade?

To: Les H who wrote (143789)	8/30/2008 9:01:07 PM
From: Les H	Respond to of 306849

Viability of Freddie Mac questioned By David S. Hilzenrath Washington Post Saturday, August 30, 2008 Washington —- Freddie Mac, which has lost more than 90 percent of its stock value since last fall, has repeatedly tried to dampen talk of a government bailout by highlighting the amount of capital it has on hand. A presentation by top executives this month offered a window into why those claims have so far failed to reassure investors. The McLean, Va., mortgage finance giant released a chart illustrating its ability to withstand an array of hypothetical financial hits. But the implication that it could maintain a big enough financial cushion was based on one government standard. Freddie Mac and its rival, Fannie Mae, must comply with other standards, and Freddie acknowledged that it may have difficulty meeting them. “We discount Freddie’s presentation … about how it can stay above regulatory-capital minimums come hell or high water,” the consulting and research firm Federal Financial Analytics said in a report to clients. “Any number of assumptions in it are questionable,” the firm said, adding that it was “a near-certainty” that Freddie Mac will ultimately become undercapitalized. Along with its competitor Fannie Mae, Freddie Mac is one of the main funding conduits for mortgage lenders, and in the current troubled environment it is widely considered essential to the nation’s mortgage system. Freddie Mac is required to maintain a financial cushion, known as capital, to absorb potential losses. As rising mortgage defaults and declining home prices take a toll on the company, one of the dangers it faces is falling below the required level of capital. That could trigger a freeze on the firm’s asset growth, restricting its ability to provide funding for mortgages. Depending on the severity of the problem, it could prompt the government to replace officers and directors or put the company in federal receivership, potentially wiping out shareholders’ value. The chart meant to illustrate the company’s financial staying power was part of a packet Freddie Mac issued when it announced that it lost $821 million in the second quarter. “We’ve obviously provided you with an extraordinary amount of information, but I’m not going to apologize for that,” Chairman and Chief Executive Richard F. Syron said in an Aug. 6 conference call with investors and analysts. As of June 30, Freddie Mac estimated it had $37.1 billion of capital, exceeding what the government then required by $2.7 billion. The surplus is small relative to the company’s overall financial picture, which includes $874.3 billion of debts and $2.2 trillion of mortgage investments and guarantees. The government’s standards are not the only way of assessing Freddie Mac’s financial fitness, and other measures underscore the challenges the company faces. For example, Freddie Mac reported that if it was forced to liquidate its assets and liabilities at their values as of June 30, it would have been left with negative $5.6 billion. Freddie Mac also reported that it ended the second quarter with $34.3 billion of unrealized losses —- declines in the value of mortgage-related investments it holds. The company says it has not counted those unrealized losses against its earnings or capital because it expects the investments to recover their lost value and plans to hold them until they do. In addition, Freddie Mac is counting as assets about $18.4 billion in deferred tax credits. The credits are useful if Freddie Mac can apply them against profits, but the company has been reporting quarter after quarter of losses. If Freddie Mac were to conclude that the odds of its being able to use tax credits are no greater than 50 percent, it would have to write them off, taking a potentially big bite out of its capital. ajc.com