Freddie Mac seeks emergency funding after posting $2bn loss

Freddie Mac, the government-sponsored company tasked with propping up the US mortgage market, said it would be forced to seek emergency funding to shore up its balance sheet after plunging $2bn (£968m) into the red.

The company yesterday said that it had hired Goldman Sachs and Lehman Brothers to tout for new funds that seemed likely to dilute existing shareholders, adding that it was also considering halving the dividend. Its shares lost more than a quarter of their value.

Along with Fannie Mae, Freddie Mac is an important prop to the US housing market, set up to help ensure that mortgage firms are willing to lend. It insures their mortgage payments or buys the mortgages from them and resells them in the financial markets, and it operates under a government guarantee that is supposed to ensure that it cannot go out of business.

The quid pro quo is that it operates under strict financial rules, many of which were tightened after an accounting scandal at the start of the decade. Regulators have demanded that it hoards 30 per cent more capital than the normal legal minimum, but the firm said yesterday it was close to falling below that level.

An appeal to have that 30 per cent rule waived was turned down, chief executive Richard Syron said yesterday, and a fundraising was vital if it was to be able to continue taking on new business. "We're not happy about this, and we don't expect you to be happy," he told investors on a conference call. "We could go to Fortress Freddie, and shrink the business, but that wouldn't be in the interests of shareholders or of the US mortgage market."

Affordable mortgages have already become harder for borrowers to find since rising defaults among low-income Americans began rippling through the financial markets at the start of the year and led to the seizing-up of parts of the credit markets in the summer. Without Freddie Mac to buy or guarantee new mortgages, other lenders could tighten their availability still further and exacerbate a housing market downturn, analysts fear.

In the financial quarter just ended, Freddie Mac wrote down the resale value of its mortgage assets by $2.7bn and set aside $1.2bn to cover bad loans. It posted a net loss of $2bn, compared with a profit of $764m in the same period last year.