July 21 (Bloomberg) -- Freddie Mac, the second-largest U.S. mortgage-finance company, may cut purchases of home loans from banks and bonds backed by housing debt to shore up its capital amid record delinquencies.

The government-sponsored company is also considering selling securities and reducing its dividend while it prepares to issue $5.5 billion of stock, McLean, Virginia-based Freddie Mac said in a July 18 filing with the U.S. Securities and Exchange Commission. JPMorgan Chase & Co. analyst Matthew Jozoff said in a report last week that growth in mortgage holdings of Freddie Mac and the larger Fannie Mae will be ``weak.''

``This just means much less credit availability for mortgage borrowers,'' said Paul Colonna, who manages more than $100 billion as chief investment officer for fixed income at GE Asset Management in Stamford, Connecticut. ``They were teed up to be saviors of the mortgage crisis, but now they've got their own capital issues.''

The Bush administration and Congress are depending on the companies to help pull the U.S. out of the housing slump because they buy mortgages from banks, providing money to make new loans. Instead, Treasury Secretary Henry Paulson was forced to seek Congressional approval last week to extend more credit to the companies and buy their shares after Freddie Mac and Fannie Mae tumbled this year in New York Stock Exchange composite trading.

FDR

Freddie Mac rose as much as 14 percent in New York Stock Exchange composite trading before closing down 43 cents, or 4.7 percent, at $8.75. Washington-based Fannie Mae rose as much as 38 percent before finishing the day higher by 73 cents or 5.4 percent, at $14.13.

Freddie Mac has lost 74 percent of its market value so far this year, while Fannie Mae has declined 65 percent.

Combined losses at the companies will probably total $48 billion through 2009, New York-based Jozoff said in the JPMorgan report dated July 18. ``Mortgage losses are significant, and will probably foster capital conservation from the agencies rather than portfolio growth,'' he wrote.

Fannie Mae, created in Franklin Delano Roosevelt's New Deal plan, and Freddie Mac, started in 1970, are getting battered as foreclosures rise to the highest rate in at least three decades, the Mortgage Bankers Association said in a June report. One in every 501 households was in a stage of foreclosure in June, and bank seizures rose 171 percent since January, 2005, according to RealtyTrac Inc., an Irvine, California-based company that sells data on defaults.

Indispensable

Fannie Mae and Freddie Mac, which have the implicit backing of the U.S. government and get access to funds at lower rates than banks, became more indispensable this year after private providers of mortgages collapsed or were acquired. New Century Financial Corp. of Irvine, California, failed. Calabasas, California-based Countrywide Financial Corp. was bought by Bank of America Corp. Demand from hedge funds, collateralized debt obligations and structured investment vehicles also slumped.

Freddie Mac and Fannie Mae, which own or insure almost half of the $12 trillion in U.S. residential mortgages, accounted for more than 80 percent of mortgage securities created in the first quarter, double the level of a year earlier, according to data compiled by Bloomberg.

At the end of March Freddie Mac had $6 billion more than the minimum capital required by its regulator, the Office of Federal Housing Enterprise Oversight, and Fannie Mae had surplus capital of $5.1 billion. The companies already raised $20 billion in the past year to cover losses and meet Ofheo rules.

Preserving Capital

Freddie Mac will probably report a surplus exceeding the minimum 20 percent required for the second quarter, according to the SEC filing. The SEC registration and equity raising will allow the company to reduce its capital surplus level to 10 percent.

While that should allow Freddie Mac to buy more mortgages, the company suggested it still needs to preserve capital.

To stay above the 20 percent requirement ``we are considering measures such as reducing or rebalancing risk, limiting growth or reducing the size of our retained portfolio, slowing purchases into our credit guarantee portfolio, issuing additional preferred or convertible preferred stock, issuing common stock, and reducing the dividend on our common stock,'' Freddie Mac said.

Fannie Mae and Freddie Mac need less capital for their business of applying guarantees to mortgage securities. The companies must hold 2.5 percent of capital against their $1.5 trillion of investments and 0.45 percent against their guarantees of $3.6 trillion of securities.

Fannie Mae paid $1.55 billion in common and preferred dividends in 2007 and Fannie Mae's payouts totaled $2.48 billion, according to the company's annual reports.

Enough?

The $5.5 billion share sale planned by Freddie Mac may not be enough, according to Friedman Billings Ramsey & Co. analyst Paul Miller. He estimated in a report today that the companies will each need to raise $10 billion to $15 billion to replenish capital. The U.S. government will seek to avoid having the companies shrink their portfolios, he added.

``The government may have to intervene through a capital infusion, and in an extreme-case scenario, through taking on the agencies' balance sheet,'' he said.

Freddie Mac probably would split fund-raising between common and preferred shares, UBS AG analysts said in a July 10 report. With Freddie Mac's market capitalization now at $5.9 billion, shareholders may suffer a 50 percent dilution of their stakes.

`Large-Scale Selling'?

Freddie Mac rose 18 percent last week and Fannie Mae jumped 31 percent after Paulson put the weight of the Treasury behind the companies, making the implicit government backing more explicit. A year ago, shares of both companies were more than $60.

Fixed-rate mortgage securities guaranteed by Fannie Mae, Freddie Mac or U.S. agency Ginnie Mae yielded 157 basis points, or 1.57 percentage points, more than Treasuries, according to Lehman Brothers Holdings Inc. index data. The spread compares with 69 basis points a year earlier.

``There's certainly fear among some investors that they might engage in large-scale selling,'' said Arthur Frank, head of mortgage-backed securities research at Deutsche Bank Securities in New York.

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

Last Updated: July 21, 2008 16:48 EDT