Freddie Mac loss bigger than expected; dividend slashed

— -- In yet another sign that the U.S. housing market continues to slump, Freddie Mac fre posted a loss of $821 million for the second quarter, slashed its quarterly dividend and promised investors that it would raise at least $5.5 billion in new capital, the institution said Wednesday.

It's the fourth quarterly loss in a row for the company, a government-sponsored entity designed to buy mortgages on the secondary market from lenders.

The magnitude of the loss, five times worse than what Freddie reported for the first quarter of 2008, stems from the general rise in home foreclosures compounded by the decline in securities made up of subprime mortgages. The collapse of subprime-backed securities has already forced the world's biggest banks to write off more than $200 billion over the past 12 months.

"We are confident the actions we are taking are strengthening Freddie Mac's financial and competitive position as well as its ability to serve the American homebuyer and will generate value well into the future," said CEO Richard Syron in a statement.

But critics contend that Syron's not doing enough. Freddie's share price continues to drop — down 18% at $6.57 in late afternoon trading — eroding its capital base. Syron says he doesn't want to raise more capital now, which would dilute the holdings of current shareholders.

"That value's already gone," says Paul Miller of FBR Capital Markets. "They need capital and they need it fast."

Freddie's losses aren't just a problem for shareholders. Like Fannie Mae fnm, another government-sponsored finance company, Freddie makes money buying mortgage loans from underwriting banks. In today's tighter credit market, the current mortgage loans are profitable, but Freddie's losses are preventing it from investing more capital in the area.

In a conference call Wednesday morning, Freddie executives said they would hold steady or even cut back on the company's existing loan portfolio, which could make mortgages even more expensive for aspiring homeowners. The Bush administration and Congress have expressed concern over the health of Fannie and Freddie this summer, noting that any problems sustained by those institutions could worsen the economic problems currently facing the nation.

"These guys can't be turned around until the housing market bottoms out," says Dan Seiver, who teaches finance at San Diego State University. "There's no sign of that happening. If the economy weakens, more homeowners are going to have trouble making payments, and they can't refinance."

Freddie shares traded at nearly $75 at their peak at the end of 2004 and have tumbled 90% from a 52-week high of $67.20 last August.

The company said Wednesday that it is slashing its quarterly dividend to 5 cents from 25 cents a share. Last November it cut its dividend from 50 cents — which was the first time it had cut its dividend since becoming a public company in 1989.