Freddie Needs Money

Freddie Mac Posts $2.0 Billion Loss-
Key points-

Freddie Mac's regulatory core capital was estimated at $34.6 billion at September 30, 2007, which represented an estimated $8.5 billion in excess of the regulatory minimum capital requirement, and an estimated $0.6 billion in excess of the 30 percent mandatory target capital surplus directed by the Office of Federal Housing Enterprise Oversight (OFHEO).

-During the third quarter, Freddie Mac reduced the balance of its cash and short-term investments portfolio by $30 billion, which helped the company manage its capital and invest in mortgage-related securities with wider OAS (option adjusted spread). Capital constraints during the quarter limited Freddie Mac's ability to take advantage of purchase opportunities for the retained portfolio and in September the company sold approximately $20 billion in UPB (unpaid principle balance) of retained portfolio assets to manage to the 30 percent mandatory target capital surplus.

-As in September, retained portfolio sales in October 2007 of approximately $25 billion largely reflected activities to manage to the 30 percent mandatory target capital surplus. During the remainder of 2007, the UPB (unpaid principle balance) of the retained portfolio may decline given the impact of the continued earnings volatility created by the current market environment and the need to manage to the 30 percent mandatory target capital surplus.

-so, It looks like Freddie spent most of the quarter juggling arount their retained assets portfolio in order to maintain the Target Capital Surplus as directed by OFHEO.
-What actions would OFHEO take if they went below 'Target Capital Surplus'? Beats me. But this weekend I will read this report:
2006 OFHEO Performance and Accountability Report

Also from Press Release-

-As a result of GAAP losses and in order to manage to the 30 percent mandatory target capital surplus and respond to regulatory concerns, as well as to have the flexibility to effectively manage its business, the company is planning on taking several actions. First, the company has engaged Goldman Sachs and Lehman Brothers as financial advisors to help it consider very near term capital raising alternatives. Second, the company is seriously considering reducing its fourth quarter common stock dividend by 50 percent. If these measures are not sufficient to help the company manage to the 30 percent mandatory target capital surplus, then the company may consider additional measures in the future such as limiting growth or reducing the size of our retained portfolio, slowing purchases into our credit guarantee portfolio, issuing additional preferred or convertible preferred stock and issuing common stock. When market conditions improve and Freddie Mac returns to sustainable profitability, the company will consider increasing the common stock dividend and returning capital to its shareholders through, among other things, calling preferred stock.

If Freddie Mac, the nation's number 2 guarantor of mortgages, decides to limit growth by slowing purchases into their guarantee portfolio, conditions in the mortgage market will get even tighter. Freddie and Fannie are already maxing out on their portfolios.
Nobody is buying subprime and alt-a securitized products, and what if nobody is guaranteeing new conforming loans? More on this later.