June 14 (Bloomberg) -- Freddie Mac, the second-largest source of money for home loans, lost money for the third straight quarter because of a decline in the value of derivatives used to hedge against swings in interest rates. Fees from guaranteeing mortgage bonds surged as it increased market share.

The net loss was $211 million, or 46 cents a share, compared with net income of $2 billion, or $2.80 a share, a year earlier, the McLean, Virginia-based company said today in a statement.

Freddie Mac, which ranks behind Fannie Mae in the $10.9 trillion U.S. residential mortgage market, said growing concern about mortgage credit risk drove down the value of some assets. Smaller swings in interest rates created losses on derivatives used to hedge against the cost of borrowing. The mortgage portfolio, which grew at a 6 percent annualized rate, limited declines.

``They are going to struggle with rising credit costs like everyone else,'' said Gary Gordon, an analyst for Portales Partners LLC in New York. He has a ``hold'' rating on the stock. ``On the flip side, they have some nice growth in their business'' of guaranteeing mortgage bonds, where revenue jumped 11 percent to $460 million.

The report is the first regular quarterly report by the government-chartered company in five years. Freddie Mac stopped reporting after disclosing in 2003 that it understated two years of results by $5 billion.

Fannie Mae and Freddie Mac, which make money by guaranteeing mortgage securities and holding home loans and mortgage securities in their portfolios, are winning share in the mortgage market and returning to timely reporting after reporting $11.3 billion in accounting errors. The mistakes led to the ouster of executives, $525 million in federal fines and tighter regulatory controls.

Shares Rise

Freddie Mac plans to release full-year 2007 results within 60 days of the end of the year and will report quarterly earnings within regulatory deadlines starting in August 2008, Chief Financial Officer Anthony Piszel said in an interview.

That will allow Freddie Mac to begin registering with the U.S. Securities and Exchange Commission in the middle of 2008, capping the company's recovery from the accounting manipulation.

Freddie Mac shares fell 62 cents to $65.24. The stock has gained 9.7 percent since March 30, beating the 7.2 percent increase in the Standard & Poor's 500 Index. The stock gained as Freddie Mac and Fannie Mae's share of all mortgage bonds sold rose to 46.9 percent in April, from 37.3 percent in the second quarter last year.

Analysts on average had predicted Freddie Mac would report a profit of $1.14 a share, according to the average estimate of five analysts surveyed by Bloomberg. The estimates were made between January and May.

Derivative Losses

The increased risk of mortgage credit contributed to a $2 billion reduction in the fair value of the company's credit guarantee portfolio, Freddie Mac said. This represents ``higher credit losses than the company expects to ultimately incur.''

Losses from the investments and derivatives were $1 billion in the quarter ended March 31, compared with a $934 million gain last year, Freddie Mac said.

``While the full impact of the housing downturn has not been felt, our credit position has remained strong relative to our historical levels and the market as a whole,'' Richard Syron, Freddie Mac's chief executive officer, said in the statement.

Derivatives are financial instruments derived from stocks, bonds, loans, currencies and other assets, or linked to specific events like changes in the weather or interest rates. Freddie Mac uses derivatives to manage interest-rate risk on its portfolio.

Low Rates

Low interest rates also hurt returns, Freddie Mac said.

The yield on the benchmark 10-year Treasury note fell to about 4.491 percent in the first week of March from a high in the quarter of 4.894 in January, according to data compiled by Bloomberg.

The spread between 10-year Treasury yields and the Bloomberg ``current coupon'' index for 30-year fixed-rate mortgage-backed securities issued by Freddie Mac widened to a gap of more than 122 basis points in early March from less than 106 basis points in the February and about 107 basis points near the start of the first quarter, according to index data compiled by Bloomberg.

``We saw a little bit of pulling in of spreads in the second quarter, not enough yet to actually move the needle on offsetting these results,'' Piszel said. ``The opportunities for the retained portfolio and putting capital to work are improving.''

Net Income

Net interest income fell to $978 million, from $1.13 billion a year earlier.

At the end of December, Freddie Mac's mortgage portfolio included $238 billion of non-agency mortgage-related securities, 96 percent of which were rated AAA. Included in this amount were $124 billion of non-agency mortgage-related securities backed by subprime loans, of which more than 99.9 percent were AAA rated.

Freddie Mac and Fannie Mae currently own $170 billion in subprime mortgage-backed securities rated AAA, James Lockhart, director of the Office of Federal Housing Enterprise Oversight, said in remarks prepared for a June 11 speech.

Washington-based Fannie Mae plans to restore timely financial reporting in February.

To contact the reporter on this story: James Tyson in Washington at at jtyson@bloomberg.net

Last Updated: June 14, 2007 16:29 EDT