Freddie Mac expects deeper losses

— -- Stunning Wall Street with a $2 billion quarterly loss, Freddie Mac fre on Tuesday warned that the worst is yet to come: It said its mortgage losses will deepen through 2009, and it's considering slashing its dividend in half and issuing a "large" amount of preferred stock to raise cash.

Wall Street reacted by pounding the company's shares, which lost nearly 29% of their market value. The stock closed at $26.74, off $10.76.

Freddie, the nation's second-largest buyer and guarantor of mortgages, blamed eroding credit quality and falling home prices, which have caused more homeowners to fall behind on their loans.

Concern that the housing market is still deteriorating was echoed by one of the nation's largest home builders, D.R. Horton. The company reported a $50 million loss in the July-through-September quarter and said that despite home price cuts, nearly half of its prospective buyers had canceled their contracts.

In many parts of the country, builders are axing construction plans. In October, construction of single-family homes slumped to the lowest point in 16 years, the Commerce Department said Tuesday.

The pain, though, is spread unevenly. Home sales in parts of the Dakotas and Carolinas, for instance, remain healthy. At the same time, many cities in California, Florida, Arizona and Nevada have seen double-digit drops in sales and prices and a spike in foreclosures.

California Gov. Arnold Schwarzenegger announced an agreement Tuesday to help several thousand of the 500,000 borrowers in the state whose adjustable-rate loans will reset to higher rates. The plan will effectively freeze the rates at their current levels for two to five years, he said, to allow property prices to recover.

Among Freddie Mac's darkest projections is that up to 5% of the loans it holds or guarantees could go into default. It says losses could hit nearly $17 billion, and it expects the worst hit to come in 2009.

Two weeks ago, Fannie Mae fnm, a larger rival, reported a $1.4 billion quarterly loss, and it's also raised money by selling preferred stock.

Freddie and Fannie were created by Congress to foster homeownership by buying and packaging mortgages. Together, the two own or guarantee 40% of the U.S. mortgage market.

Congress is considering legislation to raise the current loan limits for Freddie and Fannie, which mainly serve people with solid, or "prime," credit.

"What is most alarming is that Freddie's earnings announcement provides confirmation that the foreclosure crisis has officially spilled over into the prime market," says Sen. Chuck Schumer, D-N.Y., who has introduced one such bill. "The administration must act to use all of the tools at its disposal."