Freddie Mac plunges as housing crisis rumbles on

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The Independent Online

The head of the government-sponsored company set up to promote home ownership in the US said he had underestimated the scale of the downturn in the country's housing market.

The downbeat comments from Richard Syron, the chief executive of the mortgage trader Freddie Mac, came amid further bad news for financial services companies exposed to US housing. Freddie Mac itself posted a 45 per cent drop in quarterly profits, as a result of rising defaults by homeowners – even those with good credit histories.

Elsewhere, H&R Block said its plan to sell its mortgage business to a private equity group was in jeopardy because of deteriorating results, and another stricken mortgage firm, Thornburg, raised $500m (£248m) in an emergency fundraising that will dilute existing shareholders.

Freddie Mac – along with its sister company Fannie Mae – is a key prop to the mortgage system in the US. It ensures that mortgage firms are willing to lend, because it buys the mortgages from them and resells them in the financial markets. It operates under a federal government guarantee, and under strict rules that mean it cannot touch the so-called "sub-prime" mortgages which have been given to Americans with poor credit histories in recent years and which are now causing misery for homeowners that have become overstretched.

Defaults on Freddie Mac's own mortgage portfolio have risen sharply, Mr Syron said, meaning it is having to dip into its own coffers to pay interest on the mortgage-backed securities it has issued. Costs related to failing loans rocketed 433 per cent from a year earlier to $336m. The downturn in house prices in many parts of the country is also reducing the value of the company's underlying assets. "I was bearish," Mr Syron told investors on a conference call, "but I was not bearish enough."

A federal government measure of house price inflation released yesterday showed the average home was only 0.1 per cent more expensive in the second quarter of the year than in the first. The annual inflation rate was 3.2 per cent, the slowest recorded by the Office of Federal Housing Enterprise Oversight for a decade. Other measures of US house prices have shown average prices already falling, with the sharpest falls affecting the country's industrial heartland and areas where a speculative boom took hold in previous years.

With demand falling and repossessions at record levels, many mortgage lenders have gone bust or stopped writing new loans. The financial markets which had until recently been happy to finance their sub-prime businesses have become largely unwilling to lend to them, but there are signs that activity is returning to the less risky parts of the industry.

Thornburg yesterday sold $500m of preferred stock, convertible into ordinary shares – cash it needs to resume funding the mortgage applications that were already in its pipeline, and to pay its promised dividend. The company had been one of the top 20 lenders in the US and came close to collapse earlier this month, but it believes those that are able to survive will find the mortgage market more profitable in the future. Its shares rallied after the fundraising.

The market for loans is "slowly reverting back to normal", Greg Mason, analyst at AG Edwards, wrote in a note to clients, citing a conversation with Thornburg's chief operating officer Larry Goldstone. "It appears the bleeding in mortgage pricing has stopped for now."

H&R Block, though, said its $1.4bn deal to sell its sub-prime mortgage business to Cerberus Capital was under threat. It said it was considering selling only half the business and shutting the new lending division.

Ben Bernanke, chairman of the Federal Reserve, is expected to address the turmoil in the debt markets and the threats to the economy from the housing downturn in a speech today in Jackson Hole, Wyoming, and investors are watching for a sign the Fed may be willing to cut interest rates to ensure problems do not escalate into a downturn for the wider economy.

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