May 14 (Bloomberg) -- Freddie Mac, the second-largest U.S. mortgage-finance company, posted a loss that was narrower than analysts estimated and will raise $5.5 billion to help cushion against losses on home loans.

Freddie Mac rose as much as 10 percent in New York Stock Exchange trading after reporting a first-quarter net loss of $151 million, or 66 cents a share, beating the 84 cent average analyst estimate in a Bloomberg survey. McLean, Virginia-based Freddie Mac will raise the capital through common and preferred share sales ``in the near future,'' according to a statement today.

The company's profit was boosted by at least $1.3 billion from changes in the way it values some assets, helping overcome rising mortgage delinquencies in what Chief Executive Officer Richard Syron called a ``trying time.'' 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.

``This is probably a combination of short-term accounting effect and some other factors making the numbers look better,'' said Christopher Whalen, co-founder of independent research firm Institutional Risk Analytics in Torrance, California.

Accounting rule changes had a ``significant positive effect,'' Freddie Mac said. One change, called FAS 157, which allows companies to estimate a value on holdings that aren't traded, reduced some credit losses by $1.3 billion, Freddie Mac said. Another, FAS 159, lets companies pick and choose which financial assets and liabilities to measure at fair value on a recurring basis, added $1 billion to retained earnings.

Protecting Capital

``What that gets us to is something that more closely reflects what we believe the underlying economics are,'' Chief Financial Officer Anthony Piszel said in a telephone interview. ``It really conveys better what's going on. It also serves to protect our capital base, which then enables us to be more active in deploying capital to grow our business.''

Freddie Mac rose $2.51 to $27.47 at 10:55 a.m. in New York. The stock has plunged about 63 percent in the past year. Fannie Mae gained 86 cents to $28.98 after dropping 55 percent in the past 12 months.

Freddie Mac and Fannie Mae are government sponsored enterprises that were created by Congress to increase mortgage 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.

Market Share

The companies own or guarantee almost half of the $12 trillion in U.S. residential mortgages outstanding. That share soared to 81 percent of mortgage securities issued in the fourth quarter after regulators eased restrictions on the debt they could buy.

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, Freddie Mac said. Net interest income rose 3 percent from the previous period. 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.

The worst housing market since the Great Depression caused Freddie Mac's fair value of assets to drop to negative $5.2 billion from $12.6 billion in the previous quarter. Fannie Mae's assets fell to $12.2 billion from $35.8 billion in the period.

``Market and credit conditions remained challenging during the first quarter,'' Syron said in the statement. ``This stress is particularly evident in our increased credit-related expenses.''

Credit Losses

Freddie Mac provided about $1.2 billion for credit losses from rising delinquency rates. Freddie Mac increased its forecast for credit losses to 16 basis points, up from a prediction of 12 basis points in 2008. Credit Suisse analyst Moshe Orenbuch in New York expects Freddie Mac's credit losses to rise to 20 basis points this year. Fannie Mae last week boosted its estimates for this year to 13 basis points to 17 basis points.

``The credit losses for both GSEs will ramp up over the next few quarters and they will have to raise capital again,'' said Ajay Rajadhyaksha, the head of fixed-income strategy at Barclays Capital.

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 may wait until it has registered before raising capital.

Fannie Mae and Freddie Mac since 1970 have been exempt from registering their stock and debt securities with the SEC because of their government-chartered status. The companies bowed to congressional pressure in 2002 and agreed to register stock, plans that stalled when auditors uncovered $11.3 billion in accounting errors that forced an overhaul of internal controls.

Fannie Mae Chief Executive Officer Daniel Mudd, 49, and Freddie Mac's Syron, 64, agreed in March to raise capital after Ofheo, allowed the companies to add more assets in an effort to pump cash into the housing market and promote lending. Ofheo Director James Lockhart said yesterday that the regulator will continue easing the companies' capital restrictions as they raise more reserves.

Capital Raisings

Financial firms have raised more than $246 billion as losses and writedowns at the world's biggest banks exceed $335 billion. Analysts surveyed by Bloomberg said Freddie Mac will have to raise as much as $15 billion in capital to keep investors happy.

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 capital surplus.

Ofheo lifted limits on the size of Fannie Mae's and Freddie Mac's investment portfolios this year, ending more than two years of restrictions and in March eased the surplus requirement to 20 percent from 30 percent for both companies.

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. That would bring Freddie Mac in line with Fannie Mae, which will fall to 10 percent once its capital raising is complete.

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

Last Updated: May 14, 2008 10:56 EDT