Freddie's risks all too plain to see

NEW YORK (Fortune) -- Mortgage giant Freddie Mac (FRE, Fortune 500) says it's intent on providing a clearer view of its risks. But so far, there's little sign that investors like what they see.

On Wednesday, CEO Richard Syron said the big government-sponsored mortgage company would offer "significantly more information about our credit position." Freddie said the numbers should give investors confidence that the company has adequately reserved for future credit losses.

Handily, the figures also give analysts and investors "an erector set" for building their own loss-expectation models. With house prices falling faster than the company expected, and credit quality accordingly deteriorating more rapidly, Freddie seeks to offer "absolute complete transparency," Syron said.

But as has been the case for more than a year now, the problems confronting investors in Freddie and other financial stocks remain all too easy to see. First, losses on existing loans are rising, sharply in some cases - particularly in the Alt-A category that comprises loans to borrowers with better-than-subprime credit scores but without full documentation.

Second, though Freddie said Wednesday that it has increased its forecast for U.S. house-price declines, the company also acknowledged it's impossible for anyone to know how much worse the housing market will get.

Syron's comments come after Freddie posted a wider-than-expected $821 million second-quarter loss, following the latest multibillion-dollar addition to its reserves for credit losses. Freddie shares, whose plunge last month to a 17-year low prompted the government to prepare for a possible taxpayer bailout of the company and its sibling Fannie Mae (FNM, Fortune 500), tumbled 16% in afternoon trading.

Data posted on the company's web site quantify the company's exposure to various types of loans, such as the prime loans made to the most qualified borrowers and the Alt-A loans made further down the credit quality scale. The numbers also offer detail on the delinquency rates associated with loans made before and after the housing market's mid-decade peak. In general, late payments are higher in post-2005 loans, those made after U.S. house prices peaked.

One table showed that even if losses on Freddie's mortgage portfolio and mortgage-securities guarantees come in at the top of the company's expectations, Freddie would remain within striking distance of current regulatory capital requirements.

Even so, some of the credit quality trends are daunting. Serious delinquencies - measuring loans past due by 90 days or more, or in foreclosure - jumped to 3.72% of Alt-A loans in the second quarter ended June 30. That's more than half again as many seriously delinquent Alt-A loans as Freddie had in the first quarter, and more than triple the year-ago level.

Seriously delinquent loans have risen much less sharply in the rest of Freddie's portoflio.

The surge in Alt-A delinquencies aside, Freddie has another problem: Its past efforts to downplay the risk that it would face crunching credit losses. Back in November, when the firm swung to a $2 billion third-quarter loss in the first sign of the problems Freddie would face as house prices swooned, finance chief Buddy Piszel said the firm was expecting $10 billion in credit costs over 2008 and 2009, and that credit costs would be falling by 2010.

To date, Freddie has added $12.5 billion to its reserve for loan losses. And on Wednesday, the firm produced tables showing the lifetime default cost on its mortgage portfolio could range anywhere from $16 billion to $42 billion.

While Freddie boosted its forecast for U.S. house-price declines, to a range of 18%-20% from the previous forecast of 15%, it admitted that it has no idea how big its eventual losses might be or when the peak loss period might take place.

One last issue is an $18 billion deferred tax asset that Freddie has been carrying on its balance sheet. Analyst Robert Lacoursiere of hedge fund Paulson & Co., which has made billions betting against the housing and mortgage markets, asked Syron whether it was appropriate to count the promise of reduced taxes on future earnings in the company's capital calculations.

Syron defended the company's accounting, but Len Blum, a Freddie skeptic who is managing director at Westwood Capital, likens Freddie's stance to a consumer counting their grocery-store coupons as income.

"We're trying to be cautious," Syron said. Unfortunately for Freddie, so are its shareholders.