Freddie Mac Debt Rises Most in More Than Three Years

Freddie Mac Debt Rises Most in More Than Three Years

Jan. 2 (Bloomberg) -- Freddie Mac, the second-largest provider of money for U.S. home loans, increased its debt last month by the most in three-and-a-half years.

Debt outstanding rose $30 billion in December, or 4 percent, to $774.5 billion, according to data posted today on the McLean, Virginia-based company's Web site. Short-term borrowing drove the increase, climbing $34.8 billion to $199.4 billion.

The jump, the biggest since the peak of a record U.S. mortgage refinancing boom in August 2003, followed a shrinking of Freddie Mac's mortgage portfolio. Those assets shrank by $30.9 billion in the three months ended Nov. 30 to $701.4 billion as the government-chartered company sold record amounts of assets in September and October to remain in compliance with capital requirements.

The sharp increase in Freddie Mac's debt in December may reflect ``heavy'' buying for the portfolio, perhaps partly meant to meet annual regulatory goals tied to the amount of low-income housing that the company finances, Jim Vogel, head of agency debt research at FTN Financial in Memphis, Tennessee, wrote in a note to clients today.

A record $2.02 billion net loss for the third quarter reduced Freddie Mac's capital to about $600 million above a regulator- mandated minimum, prompting it to sell $6 billion in preferred stock in November and slice its dividend in half.

``Prior to that we had capital constraints that would hinder some of our normal business activity,'' John Radwanski, the company's vice president of debt funding, said in a telephone interview today. ``The capital infusion at the end of November freed up Freddie Mac from those restraints.''

Commercial Paper

Congress created Freddie Mac and Washington-based Fannie Mae to lower home financing costs and to provide mortgage market stability. The companies own or guarantee about 40 percent of the $11.5 trillion U.S. residential mortgage market.

The increase in Freddie Mac's debt came as investors continued to avoid types of other short-term borrowing amid concerns about the fallout from rising home-loan delinquencies.

The U.S. asset-backed commercial paper market shrank for the fifth month in December, to the lowest since July 2005. Debt maturing in 270 days or less and backed by mortgages, bank debt and other holdings declined $15.9 billion, or 2.1 percent, to a seasonally adjusted $747.6 billion for the week ended Dec. 26, the Federal Reserve in Washington said Dec. 27.

Freddie Mac ended up with such a sharp increase in short-term debt partly because it retired longer-term callable debt as interest rates fell, Radwanski said. ``Callable debt comes off the books a lot faster than it comes on the books,'' he said.

Investors also were demanding less of a premium over benchmarks on Freddie Mac's short-term debt than on its long-term debt, he said. ``From an economic standpoint, it also made a lot of sense for us to take advantage of that.''

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