Freddie Mac sells $6bn in stock to ward off capital fears

Freddie Mac has announced it will sell $6 billion in preferred stock, in a bid to restore regulator and investor confidence and avoid breaching minimum capital requirements.

In addition to the sale, the government-sponsored entity (GSE) has also slashed its dividend by 50% to just $0.25, to boost dwindling reserves following large losses announced last week.

The GSEs have had a tough third quarter, with Freddie and sister GSE Fannie Mae recording losses of $2.02 billion and $1.4 billion, respectively. The falls "reflect the significant deterioration of mortgage credit as a result of continued weakness in the housing market," Freddie explained in its third-quarter filing to the SEC earlier this month.

The filing also revealed that Freddie's recent losses have left it precariously close to the minimum capital requirements asked of the firm by its regulator, the Office of Federal Housing Enterprise Oversight (OFHEO).

The company's regulatory core capital was $34.6 billion at the end of September 2007, comfortably above the firm's minimum capital requirement of $26.2 billion.

However, OFHEO requires the company to hold an additional 30% - $7.9 billion -  leaving Freddie with just $600 million more in its reserves than the regulator demands. Freddie hopes the stock sale and dividend cut will be enough to swell the firm's capital base.

"This is a proactive capital management plan that will help us meet the 30% surplus and address regulatory concerns, and provide sufficient capital to continue fulfilling our important housing mission through the current market environment," said Freddie Mac chief executive officer Richard Syron.

The news comes a day after OFHEO announced the conforming loan limit on the value of mortgages GSEs can purchase will be frozen in 2008. For the third year running, Freddie Mac and Fannie Mae will only be able to guarantee or purchase mortgages worth less than $417,000.

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