Freddie Mac’s net income drops 45%

Freddie Mac, the nation’s No. 2 buyer and backer of home mortgages, said Thursday that it set aside more than $300 million in the second quarter to account for bad loans, contributing to a 45% drop in profit.

The company is seen as a source of housing market stability, along with its larger government-sponsored sibling Fannie Mae. Nevertheless, McLean, Va.-based Freddie Mac said it recorded the provision for credit losses in the quarter because of problems with loans originated this year and last year.

It comes amid a deepening mortgage crisis nationwide that has brought down more than 50 lenders, many of which catered to borrowers with weak, or sub-prime, credit.

Shares in Freddie Mac fell $3.18, or 5%, to $60.07 on the news.

Freddie Mac said it was seeing higher delinquency rates on the East and West Coasts, not just in areas of the Midwest with high rates of unemployment.

“For anybody who thinks the housing issues are confined to sub-prime [mortgages], that’s clearly not the case,” said Frederick Cannon, an analyst with Keefe, Bruyette & Woods.

Freddie Mac said losses from defaulted mortgages, while still a tiny portion of the company’s mortgage portfolio, rose to 0.02% in the second quarter and are expected to keep rising into next year. Although those losses are worsening, they are still below average for the company, Chief Financial Officer Buddy Piszel said.

“Given the credit environment, we think we performed reasonably well,” he said.

The government-sponsored company, which is returning to normalcy after an accounting scandal four years ago, makes money from interest payments on mortgages it holds on its books, and from fees from insuring mortgages sold to investors.

It earned $764 million, or $1.02 a share, for the three months that ended June 30. That contrasted with profit of $1.4 billion, or $1.93, a year earlier. Revenue rose 4.8% to $2.26 billion.

The earnings results missed Wall Street expectations, with analysts surveyed by Thomson Financial expecting a profit of $1.16 a share on revenue of $1.69 billion for the quarter.