Big loss for Freddie Mac

Freddie Mac (FRE) posted a bigger-than-expected fourth-quarter loss and warned that a weakening economy will lead to higher credit losses in 2008 and 2009. The McLean, Va., mortgage lender lost $2.5 billion, or $3.97 a share, for the quarter ended Dec. 31, compared with a year-ago loss of $401 million, or 73 cents a share. Analysts on Wall Street were looking for a loss of $2.04 a share.

Freddie said the latest-quarter loss reflected mark-to-market losses of $800 million on the value of the company’s credit guarantee asset and $2.3 billion on the value of the company’s derivatives portfolio, both due to the impact of declining long-term interest rates. Credit-related expenses, consisting of provision for credit losses and real estate owned operations expense, were $912 million for the fourth quarter, compared to $1.4 billion for the third quarter. Freddie said it expects total credit losses of $2.2 billion in 2008 and $2.9 billion in 2009, as a result of the deteriorating housing market.

The company also said it had adopted new accounting policies that “significantly enhance the transparency and understandability of the company’s financial results, promote uniformity in the accounting model for the credit risk retained in its primary credit guarantee business and better align revenue recognition to the release from economic risk of loss under its guarantee.” Under Freddie’s old accounting, its fourth-quarter loss would have been $3.7 billion.

The shift comes on the day that the company returned to timely financial reporting following several years of late filings as Freddie sought to fix problems with its accounting and financial oversight. Freddie’s promise to return to timely reporting was partly behind Wednesday’s decision by its regulator, the Office of Federal Housing Enterprise Oversight, to lift limits on the mortgage-portfolio holdings of Freddie and its government-sponsored sibling Fannie Mae (FNM). The hope is that Fannie and Freddie can ease the housing crunch by making the mortgage market more liquid. But as Thursday’s numbers show, the companies have plenty of problems of their own.