June 26 (Bloomberg) -- Freddie Mac Treasurer Timothy Bitsberger said the subprime mortgage slump is ``severe but contained.''

Subprime borrowers, people with the riskiest credit records, make up a small part of the U.S. mortgage market and are mostly in seven states, Bitsberger said today at a conference in London. The owners of bonds made up of subprime mortgages are mainly ``large institutional players who can withstand the loss,'' he said. Freddie Mac is the second-biggest U.S. mortgage finance company.

Rising defaults on U.S. subprime mortgages have pushed at least 60 mortgage companies to close or sell their operations and forced Bear Stearns Cos. to offer as much as $3.2 billion to bail out a money-losing hedge fund. New foreclosures jumped to a record in the first quarter, led by subprime borrowers, according to the U.S. Mortgage Bankers Association.

The housing market may deteriorate if there's an ``overreaction'' from regulators, said Bitsberger, a former U.S. Treasury official.

The fallout will also increase if investors and hedge funds rush to unwind their positions at the same time, he said. The market's ``financial infrastructure'' is ``untested'' because of the pace of growth in bonds backed by mortgages and other debt, known as collateralized debt obligations, he said. CDOs package bonds, loans or credit-default swaps and use their income to pay investors.

Young Market

The market for asset-backed debt is ``still relatively young and relatively new and we've still yet to see a shakeout,'' he said. ``The jury's still out as to how this will play out. I don't want to say that we're in untested waters but it does scare a lot, it does become a bigger issue among many more hedge funds.''

The extent of the losses will also hinge on ratings companies, said Bitsberger.

``There's a lot of dependency on the ability of the rating agencies to make objective judgments'' of the risks backing the bonds, he said. ``I wouldn't be surprised to potentially see a re-rating of these securities.''

CDO Losses

Buyers of some investment-grade portions of CDOs backed by subprime mortgages will lose all their money, Bill Gross, manager of the world's biggest bond fund at Pacific Investment Management Co. in Newport Beach, California, said today.

Holders of pieces rated BBB may lose their entire investment with subprime defaults at 7 percent, said Gross. CDO slices rated at A may also be wiped out if defaults reach 10 percent, Gross said in a monthly commentary posted on Pimco's Web site.

Freddie Mac in McLean, Virginia and Washington-based Fannie Mae were created by Congress to expand home ownership by increasing the financing available to borrowers. They make money by holding mortgage assets as investments and from fees for guaranteeing mortgage-backed securities owned by others.

To contact the reporters on this story: Neil Unmack in London at nunmack@bloomberg.net; John Glover in London at johnglover@bloomberg.net

Last Updated: June 26, 2007 12:21 EDT