By J.W. ELPHINSTONE
NEW YORK (AP) -- Freddie Mac on Wednesday posted a second-quarter loss that was more than three-times larger than Wall Street expected as a huge number of borrowers with good credit fell behind on their exotic and risky mortgages.
The losses were concentrated in a handful of state -- California, Florida, Nevada, and Arizona -- where home prices shot up the most and are now falling precipitously.
The dismal financial results come just weeks after the government threw a financial lifeline to Freddie and its sister company Fannie Mae to ward off fears the pair could collapse and take down the U.S. mortgage market. Together, the two hold or guarantee nearly half of outstanding U.S. mortgage debt.
Freddie lost $821 million, or $1.63 a share, for the quarter that ended June 30, compared with a profit of $729 million, or 96 cents a share, in the year-ago period.
Revenue fell to $1.69 billion from $2.34 billion.
Stock analysts surveyed by Thomson Financial expected a loss of just 53 cents a share.
In a troubling sign that mortgage delinquencies and foreclosures are increasing, Freddie set aside $2.5 billion -- more than double what it had reserved in the first quarter.
Freddie Mac Chief Financial Officer Buddy Piszel told The Associated Press that the credit problems are emerging mostly in the company's Alt-A portfolio, which contains mortgages with high risk factors like undocumented borrower income or no down payments.
Alt-A loans make up about 10 percent, or $190 billion, of Freddie's entire portfolio, but accounted for more than half of the company's credit losses in the quarter.
For all of Freddie Mac's loans, the percentage of loans more than three months past due edged up to 0.82 percent from 0.74 percent.
Freddie's cash cushion against losses also shrank during the quarter, falling to $37.1 billion, or $2.7 billion more than the 20 percent surplus required by its federal regulator.
To preserve capital, the government-sponsored company said it expects to cut its dividend this quarter to 5 cents or less a share from 25 cents a share.
The McLean, Va.-based company also said it would sell at least $5.5 billion in stock.
Shares of Freddie were down 92 cents at $7.12 a share in midday trading Wednesday.
As part of a sweeping housing rescue bill signed last week by President Bush, the Treasury Department gained unlimited power through 2009 to lend money to Freddie and Fannie or buy their stock if needed.
"We're managing the firm to not have to access the government support," Piszel told the AP.
Also, the Federal Reserve said it would offer a special lending option to the pair and will take on a new role overseeing the two companies.
On Tuesday, the Treasury Department said it retained investment firm Morgan Stanley to help the government assess the state of the mortgage market and give a financial profile of Fannie and Freddie.
Also on Tuesday, Fannie Mae said it will double the fee it charges lenders and brokers to help it gird against higher credit risks and losses from mortgages it buys from lenders.
Piszel said Freddie is evaluating its pricing, but isn't announcing any action now.
Fannie Mae reports its quarterly financial results Friday.