Aug. 6 (Bloomberg) -- Freddie Mac, the U.S. mortgage-finance company hobbled by record foreclosures, will slash its dividend at least 80 percent after posting a quarterly loss that was three times wider than analysts' estimates.

Freddie dropped 11 percent in early New York Stock Exchange composite trading after reporting a second-quarter net loss of $821 million, or $1.63 a share, compared with the 54 cents a share average estimate of nine analysts in a Bloomberg survey. The common-share dividend will be reduced to 5 cents or less from 25 cents, the second cut in nine months, McLean, Virginia-based Freddie said today in a statement.

Credit-related expenses doubled from the first quarter to $2.8 billion and Freddie wrote down the value of subprime and low-quality mortgage securities by $1 billion as the biggest housing slump since the Great Depression increased delinquencies. Freddie Chief Executive Officer Richard Syron said he still plans to raise capital after U.S. Treasury Secretary Henry Paulson was forced to step in with a rescue plan to restore confidence in Freddie and the larger Fannie Mae.

``This correction is more severe than what we've seen in the recent past,'' said Christopher Whalen, co-founder of independent research firm Institutional Risk Analytics in Torrance, California. ``Both Fannie and Freddie are going to be profoundly insolvent by the time we're done with this.''

Stock Drops

Freddie has plunged 76 percent this year on the New York Stock Exchange on concern the company may not have enough capital to overcome loan delinquencies on the $2.2 trillion of mortgages it owns and guarantees. Syron, 64, agreed to raise $5.5 billion in equity though failed to complete the sale as the stock slumped.

``We remain committed to raising $5.5 billion of new capital and will evaluate raising capital beyond this amount depending on our needs and as market conditions mandate,'' Syron said in today's statement.

Freddie fell 86 cents to $7.18 at 8:10 a.m. in New York. Washington-based Fannie, scheduled to report earnings Aug. 8, dropped $1.40, or 10 percent, to $12.20.

Freddie in November halved its dividend and sold $6 billion in preferred stock to offset writedowns and losses on mortgages it owns or guarantees. Washington-based Fannie since December has raised about $14.4 billion in preferred and common stock.

``Home prices have declined and have hurt them, as has the decrease in home sales,'' said Credit Suisse Group's Moshe Orenbuch, the top-ranked analyst covering the company. ``What you need for this stuff to work its way through is for homes to get through the foreclosure process and be sold.''

Orenbuch, based in New York, has an ``underperform'' rating on Fannie and Freddie.

Increasing Losses

The second-quarter net loss is Freddie's fifth in the past six quarters. The company reported net income of $764 million, or $1.02 a share, in the year-earlier period.

Fannie and Freddie, government-sponsored enterprises created by Congress to boost mortgage financing, own or guarantee 42 percent of the $12 trillion U.S. home loans outstanding. They make money by holding mortgage assets that yield more than their debt costs, and by guaranteeing bonds they create out of loans.

Paulson last month received authority for his plan to buy unlimited equity stakes in the companies and extend them financing if needed to help bolster confidence in the companies. The Federal Reserve was also given permission to lend directly to Fannie and Freddie.

Freddie's regulatory core capital was $37.1 billion at the end of the quarter, about $8.4 billion above the statutory minimum requirement and $2.7 billion above the 20 percent mandatory target capital surplus set by the company's regulator.

Credit Losses

Net interest income almost doubled to $1.5 billion, driven by lower rates on the company's debt funding and an increase in its retained portfolio. Management and guarantee income fell 4 percent to $757 million as interest rates increased.

Foreclosures on properties owned by Freddie increased 20 percent in the quarter, the company said in the statement.

Credit losses were 17.3 basis points over the average total mortgage portfolio, up from 11.6 basis points in the first quarter.

Freddie had projected credit losses of 12 basis points or $2.2 billion for this year and 14 basis points or $2.9 billion in 2009. Orenbuch said he expects Freddie's credit losses to rise to 20 basis points this year and 29 basis points in 2009.

As part of the $1 billion in writedowns, Freddie reduced the value of securities backed by subprime or Alt-A mortgages by $826 million. Subprime loans are made to people with poor credit. Alt- A loans are given to people with better credit who may seek more lenient terms such as providing less documentation for the loan.

Freddie posted $4.6 billion in losses in the previous three quarters, while Fannie had $7.1 billion. Freddie's fair value was negative $5.6 billion at the end of the second quarter.

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

Last Updated: August 6, 2008 08:27 EDT