March 23 (Bloomberg) -- Freddie Mac, the second-largest U.S. mortgage finance company, reported a $480 million net loss in the fourth quarter as fees from providing guarantees for bonds fell and it lost money on derivatives.

The loss compares with net income of $684 million in the fourth quarter of 2005, the McLean, Virginia-based government- chartered company said in a statement today. Freddie Mac and the larger Fannie Mae own or provide guarantees on about 40 percent of the $10.5 trillion U.S. residential mortgage market.

Freddie Mac's results show the company ``is becoming a lower margin, lower volume, lower risk and higher capitalized'' business, Jim Vogel, head of agency research at FTN Financial in Memphis, Tennessee, said in a research note today. ``That formula means it is going to have to streamline costs and become still more aggressive when odds are in its favor.''

Freddie Mac hasn't released timely financial reports since disclosing in 2003 that it understated earnings by $5 billion to minimize earnings volatility. It plans to provide results for the first quarter of 2007 ``sometime after Memorial Day,'' a U.S. holiday on May 28, Freddie Mac Chief Operating Officer Eugene McQuade said today in an interview.

The company in January said it would report a loss in the fourth quarter as lower bond yields reduced investment returns. Losses ``on the company's credit guarantee portfolio, derivatives and administrative expenses more than offset net interest income and management and guarantee income,'' Freddie Mac said today.

The loss was narrower than the $500 million posted in the third quarter. For the quarter, the company reported a loss of 85 cents per share compared with income of 90 cents per share during the same period of 2005. For the year, it earned $2.2 billion, or $2.84 a share, up from $2.1 billion, or $2.75, in 2005.

Subprime Concerns

Freddie Mac stock has declined 8.1 percent this year amid investor concern that instability in the subprime mortgages may spread to the broader economy. Late payments on subprime loans reached a four-year high of 13.3 percent in the fourth quarter, according to the Mortgage Bankers Association in Washington.

Freddie Mac shares rose 13 cents to $62.37 today in New York Stock Exchange composite trading.

Freddie Mac also said today it plans to buy back $1 billion in stock.

The company said last month it will stop buying subprime mortgages and securities that have a ``high likelihood'' of borrowers not meeting rising monthly payments. It will require lenders to assess borrowers' ability to pay back subprime adjustable-rate mortgages by looking at more than just their capacity to make initial ``teaser'' payments.

Subprime Ratings

As of the end of December its $704 billion retained portfolio included $238 billion of non-agency mortgage-related securities, 96 percent of which were rated AAA or equivalent. 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.

``We don't think we'll lose any money at all on subprime,'' McQuade said. ``Credit has never been better.'' Freddie Mac's delinquency rate ``is about 20 percent or 30 percent less than it was a year ago at this time,'' he said.

`Great Opportunity'

A decline of capital in the subprime mortgage market ``is a great opportunity for us,'' Mcquade said. ``This is where we really shine.''

While ``others are withdrawing their liquidity, we have stepped in during the first two months'' of 2007 and bought mortgages and mortgage securities, he said.

Freddie Mac and Fannie Mae profit by guaranteeing mortgage securities and by holding home loans and mortgage securities in their portfolios. Freddie Mac's portfolio expanded in February at a 5.1 percent annual rate, the second consecutive monthly increase. The portfolio grew by $3 billion to $709.2 billion following a decline of 0.9 percent for all of 2006.

Freddie Mac Chief Executive Officer Richard Syron and his counterpart at Fannie Mae, Daniel Mudd, cautioned Congress during March 15 testimony not to curb their companies' growth and hinder their ability to provide money to stabilize mortgage markets.

Congress since 2003 has considered creating a tougher regulator for the companies with power to cut their mortgage holdings, bar new lines of business and increase their reserve capital requirements. Fannie Mae overstated earnings from 2001 until mid-2004 by $6.3 billion.

Reserve Capital

The Office of Federal Housing Enterprise Oversight in July required Freddie Mac to constrain quarterly growth of its mortgage portfolio to 0.5 percent beyond the June 30 level of $722.2 billion pending completion of improvements in accounting and corporate governance. Freddie Mac also must hold 30 percent more reserve capital.

The company had a loss in the quarter of $1.03 billion on derivatives used to hedge against interest rate risk. Freddie Mac typically never realizes gains or losses from derivatives because it holds the instruments to maturity.

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.

Net interest income for the year declined by $1.2 billion to $4.2 billion. In addition, the company estimates that the fair value of new business booked in 2006 was lower than the fair value of new business in 2005. Overall, the fair value of net assets attributable to common stockholders, before capital transactions, rose by about $2.5 billion for 2006, compared with an increase of $1.0 billion in 2005.

`Go Faster'

Freddie Mac last year spent $3 billion in total expenses, or the same as in 2005, the company said. Of that, administrative expenses rose to $1.6 billion from $1.5 billion in 2005 ``primarily due to higher professional services costs related to improved technology and internal control over financial reporting,'' the company said.

``Our hope is that we can go faster'' in releasing financial results, Chief Financial Officer Anthony Piszel said in a conference call with analysts.

Freddie Mac is ``still new in getting to our monthly closes and we don't want to make a commitment that we can't hit,'' Piszel said. ``But we will try to issue the first quarter as soon as we're comfortable we've got it right.''

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

Last Updated: March 23, 2007 16:29 EDT