May 14 (Bloomberg) -- Freddie Mac, the second-largest U.S. mortgage-finance company, reported a smaller loss than analysts estimated after accounting changes reduced charges by at least $2.6 billion.

Without the use of two new accounting rules, Freddie Mac would have posted a loss of at least $1.7 billion, analysts said. A change in the way the company values some assets that aren't traded reduced credit losses by $1.3 billion, while a separate rule that lets the company pick and choose which assets to measure contributed an equal amount, Freddie Mac said.

``They put a lot of lipstick on this pig including several accounting changes that have given them a one time step-up,'' said Josh Rosner, an analyst at independent research firm Graham Fisher & Co. in New York.

Freddie Mac rose 9.2 percent in New York Stock Exchange trading after reporting a first-quarter net loss of $151 million, or 66 cents a share, better than the 84-cent average analyst estimate in a Bloomberg survey. McLean, Virginia-based Freddie Mac announced plans to raise $5.5 billion in a sale of common and preferred shares ``in the near future'' to combat rising loan delinquencies, according to a statement today.

The new accounting had a ``significant positive effect,'' reducing volatility in the value of the company's $738 billion in mortgage holdings, as well as for securities and derivatives used to hedge against credit and interest-rate risk, Freddie Mac said.

Freddie Mac spokesman Michael Cosgrove said, ``clearly, based on the comments and reports this morning by the real, substantive analysts who follow this company, the Street is comfortable with our accounting and reporting, and encouraged by the results we presented today.''

Being Selective

Chief Executive Officer Richard Syron said the new accounting better reflects ``the underlying performance of our business'' as the housing market continues to deteriorate. The loss from Freddie Mac, which owns or guarantees about a fifth of U.S. residential mortgages, was narrower than the $2.19 billion loss recorded last week by bigger competitor Fannie Mae.

Freddie Mac rose $2.29 to $27.25. The stock has plunged about 59 percent in the past year. Fannie Mae gained $1.77, or 6.3 percent, to $29.89 today.

Credit Suisse analyst Moshe Orenbuch, who has an underperform rating on Freddie Mac stock, said the accounting changes made the company's performance look better and was skeptical of the surge in stock price.

``Obviously people liked it,'' Orenbuch said. ``Management was selective as to how they applied certain accounting principles.''

Accounting Standards

Financial Accounting Standard 157 allows companies to estimate a value on holdings that aren't traded. Freddie Mac used FAS 157 to list $156.7 billion in so-called Level 3 assets, a category that indicates the holdings are so illiquid that they can only be priced using the firm's own valuation models.

The Level 3 holdings represent 23 percent of assets and are up from $31.9 billion as of December.

The first-quarter results also benefited from a change in policy for buying seriously delinquent loans, those at least 120 days past due, out of the mortgage pools Freddie Mac guarantees. The company must book the decline in value on loans bought from pools at the time of purchase. It ended that practice, cutting losses to $51 million from $736 million in the fourth quarter.

Freddie Mac and Fannie Mae are were created by Congress to increase home-loan financing and provide market stability. They make money by holding mortgage assets that yield more than their debt costs, and by guaranteeing bonds they create out of loans.

Fair Value

The companies, which own or guarantee almost half of the $12 trillion in U.S. home loans, have reported three straight losses amid the worst housing market since the Great Depression. Freddie Mac now owes more on its liabilities than its assets are currently worth. This so-called fair value of assets fell to negative $5.2 billion from $12.6 billion the previous quarter.

Freddie Mac also adopted FAS 159, which lets it pick which financial assets and liabilities to measure at fair value through earnings. Using the rule reduced the losses by $1.3 billion.

Friedman, Billings, Ramsey & Co. analyst Paul Miller, who has an underperform on the stock, said investors should be concerned that the company hasn't set aside enough reserves, which pushes some credit losses to future quarters, Miller said.

``They're not provisioning in front of it so those losses are going to flow through their income statement for years,'' he said. ``Therefore we don't think that the earnings pickup over the next two or three years is going to be that meaningful.''

Freddie Mac set aside $1.24 billion in the quarter against its future credit losses compared to $3.07 billion at Fannie Mae.

Credit Losses

Freddie Mac increased its forecast for credit losses to 16 basis points, up from a prediction of 12 basis points in 2008.

Credit Suisse's Orenbuch expects the losses to rise to 20 basis points this year. Fannie Mae last week boosted estimates for this year to a range of 13 basis points to 17 basis points.

Freddie Mac's management and guarantee revenue rose 26 percent from the fourth quarter to $789 million, reflecting an increase in business and a higher fee rate of 18.2 percent. Net interest income rose 3 percent. Guarantee revenue will rise as much as 20 percent in 2008 and net interest income growth will be as much as 50 percent, Freddie Mac said in the statement.

The first-quarter net loss is Freddie Mac's fourth in the past six quarters. The company reported a net loss of $211 million, or 46 cents a share, in the year-earlier period.

`Moving Ahead'

Freddie Mac said it is ``moving ahead'' with plans to register with the Securities and Exchange Commission. The company will hold off on its capital plans until it has registered.

A $5.5 billion capital raising would take Freddie Mac's offerings to $11.5 billion in six months. The company said its core regulatory capital rose to $38.3 billion at the end of the quarter, about $6 billion above the 20 percent mandatory surplus.

The Office of Federal Housing Enterprise Oversight lifted limits on the size of Freddie Mac's investment portfolio this year, ending more than two years of restrictions and in March eased the surplus requirement to 20 percent from 30 percent.

The regulator will reduce Freddie Mac's cap to 15 percent once the capital is raised, and to 10 percent once it is registered with the SEC.

To contact the reporter on this story: Dawn Kopecki in Washington at dkopecki@bloomberg.net;

Last Updated: May 14, 2008 16:37 EDT