Mortgage slump hits Freddie Mac

Freddie Mac said credit losses would continue into next year

US mortgage lender Freddie Mac has suffered a steep fall in second quarter profits, as increased potential defaults on home loans took their toll.

The government-backed firm that buys mortgages from commercial lenders saw 45% wiped off its net income to $764m (£379.2m), from $1.4bn the year before.

Freddie Mac blamed failing home loans taken out when the cost of debt was cheaper for the fall in profits.

But it said negativity about the state of the housing market was overdone.

'Well positioned'

Freddie Mac said that there was a general weakening in the credit and housing market which could eat into future profits.

But it denied that it has specific problems in the sub-prime market, where it holds $120bn of sub-prime mortgage-backed securites, around 12% of its total portfolio.

The sub-prime crisis which is creating problems in the wider financial markets essentially stems from the growing unaffordability of variable-rate mortgages, which typically start with a low interest rate and then rise sharply.

These were sold in great numbers by mortgage brokers over the past few years.

On the credit front we are seeing weakening Richard F. Syron, Freddie Mac chief executive

Freddie Mac said its focus on traditional, fixed-rate mortgages which have become more popular in recent months would stand it in good stead as the credit woes continue.

But it still expects to see further credit losses in 2008.

"On the credit front we are seeing weakening," said Richard F. Syron, the firm's chairman and chief executive.

"But we are well positioned relative to the overall marketplace to weather the ongoing disruptions in the mortgage markets and emerge as an even stronger player."

He also said the company was working with its regulator to help develop a "response that will help provide stability, liquidity and affordability to the national housing and mortgage markets".

Earlier this month, the firm said it would introduce new 30-year, and possibly 40-year, fixed rate home loan deals.

These would be offered to credit-worthy but low-income borrowers who can no longer afford their current mortgage repayments and give them a chance to stay in their homes.

Freddie Mac would like the Federal govenrment to increase its borrowing limits, and there are alo proposals for an increase in the maximum size of mortgages it is able to lend on, from the current level of $417,000.