Freddie Mac posts $2 billion loss

WASHINGTON -- Mortgage market woes just got a lot worse with the disclosure that the nation's second-largest buyer of home loans needs more capital or must retrench.

The warning is rippling through an already battered housing market, and it could become difficult even for borrowers with pristine credit and hefty downpayments to get a home loan. Could Freddie Mac's $2 billion loss last quarter be the tipping point that turns the housing slump turn into an economic slowdown?

Bigger-than-expected losses at the government-sponsored agency, reported Tuesday, caught an edgy Wall Street off-guard. Shares of Freddie Mac plunged 25.5 percent after it said it must set aside $1.2 billion to account for bad loans and that it may slash its quarterly dividend of 50 cents per share in half. It was the biggest one-day price decline and would be the company's first dividend cut since becoming a public company in 1989.

The mortgage market shuddered at Freddie's loss, coming just days after a $1.4 billion quarterly deficit was revealed by Fannie Mae, its bigger government-sponsored rival.

"It's going to make it increasingly difficult for Americans to borrow money to buy homes," said Peter Schiff, president of Euro Pacific Capital in Darien, Conn., who has long had a bearish perspective on the housing market. "This is not a subprime problem. This is a mortgage problem."

Fannie Mae and Freddie Mac were created to be a key source of funding for the housing market through their purchases of home loans made by banks and other lenders, which are then bundled and sold to institutional investors.

Executives of McLean, Va.-based Freddie Mac said Tuesday there is little to be optimistic about in the near term, cautioning investors to brace for more bad news.

"This is a very, very difficult time. This is not happy news," Freddie Mac's chairman and CEO, Richard Syron, said in a conference call with Wall Street analysts.