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Last Updated: Tuesday, 20 November 2007, 22:03 GMT
Record defaults hit Freddie Mac
House being built in California

Freddie Mac, the company that provides financing and guarantees to US mortgage lenders, has announced huge losses from home loans that may never be repaid.

The firm has set aside $1.2bn (580m) to cover bad debts between July and September and reported a $2bn loss.

Freddie Mac and its sister company Fannie Mae had been expected to be less hard-hit by defaults because they are less exposed to sub-prime loans.

The company's shares fell 29% in Tuesday trading in New York.

Freddie Mac said it was "seriously considering" halving its dividend before the end of the year and has taken on two investment banks to look at ways it can raise more capital in the near future.

Freddie Mac and Fannie Mae were created by the US government but later privatised. They are still known as government-sponsored enterprises and are still able to borrow at a lower rate of interest because bond markets believe that the US government would not allow them to go bankrupt.

As a result, the bonds that they issue to raise money to buy home loans are considered low-risk.

Both firms have strict rules about what sort of mortgage debt they are allowed to buy, and limits on the size of the total mortgage must be below $417,000.

This part of the mortgage market has not been as hard-hit as sub-prime mortgage sector.

Separately, Countrywide Financial, the largest US mortgage lender tried to reassure investors of its position.

In a statement it said that it had enough capital and that it was "well-positioned" to gain from turmoil in the mortgage sector.

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