Freddie Mac, the second-biggest buyer of US home mortgages, said it will sell $6 billion of preferred stock and slash its dividend in half as mortgage defaults and foreclosures continue to do damage to its balance sheet.
Sources said yesterday that Freddie Mac’s advisers at Lehman Brothers and Goldman Sachs have lined up a large anchor investor who has agreed to buy a substantial amount of preferred stock in the offering. The identity of the investor was unclear yesterday, but sources said the cash is not coming from the Middle East or from a private investment firm.
The preferred sale will help “address regulatory concerns” and accounting standards, and “provide sufficient capital to continue fulfilling our important housing mission through the current market environment,” Freddie’s chief Richard Syron said in a statement. The company’s dividend was cut to 25 cents from 50 cents.
Losses tied to bad loans reduced Freddie’s core capital cushion by two-thirds last quarter, leaving the McLean, Va.-based company with just $600 million more than the reserve level required by its regulator.
Rising foreclosure filings and falling home prices are likely to lead to more losses at Freddie, which owns or guarantees one in five US residential mortgages.
Sources said the preferred stock will likely carry an 8.25 percent interest rate and mature in about 5 years. Larger competitor Fannie Mae this month raised $500 million in preferred stock after reporting a third-quarter loss of $1.4 billion. The company is paying a dividend of 7.625 percent.
Freddie reported a third-quarter net loss of $2.02 billion, or $3.29 a share, three times what some analysts estimated. The company’s stock then tumbled 29 percent in its biggest decline since its shares started trading in 1988.
Shares rose $1.23 to $25.73 yesterday but traded down in after-hours after news of the deal was released.