WASHINGTON–The financial troubles that mortgage finance companyFreddie Mac revealed yesterday have been caused in part by theshaky condition of monoline mortgage insurer Financial GuarantyInsurance Company, sources said.

Freddie Mac took a $300 million charge against earnings, citingfears that an unidentified monoline mortgage insurer will not beable to pay expected claims on losses from securities backed byAlt-A and subprime loans.

It said in a Securities and Exchange Commission filing thatthere is a significant possibility that Freddie Mac will facecontinued adverse developments that could result in the companyfalling below capital levels mandated by the government.

The company also said its mortgage-backed securities holdingsdeclined by $1.

Two sources with knowledge of the situation said the mortgageinsurer mentioned as one source of Freddie Mac's difficulties isFGIC.

The Freddie Mac write-down appears to be another nail in thecoffin of the insurer whose ratings were downgraded to junk lastweek by Fitch Ratings. Fitch said it acted because off concernsthat New York-based FGIC's bond insurance unit may be taken over byregulators.

Fitch also cut FGIC's long-term issuer rating to“triple-C-minus” from “double-B,” saying it expects the company toreport more losses on securities backed by subprime mortgages. Bothratings may be cut further, Fitch said.

The rating concern said it acted on the “expectation that FGICwill experience further credit deterioration on its book ofbusiness backed by residential mortgage-backed securities.'”

“This deterioration could lead to further additions in lossreserves which will increase the possibility that FGIC could becomesubjected to some form of regulatory intervention,” Fitch said.

A spokesman for Freddie Mac would not identify by name theentity which had insured the asset-backed securities on which ittook the write-off. The spokesman would only identify the entity asa “large monoline bond insurer that is in financial difficultytoday.”

But a securities analyst in New York who asked not to beidentified by name said it was most likely FGIC because it is aprivately owned bond insurer, which makes it difficult to raise newcapital.

The Freddie Mac spokesman said, “As a result of this weakenedfinancial condition, we believe it is possible that they may not beable to meet their obligations and insure these bonds that they areproviding coverage for us, so as a result we recorded an impairmentof about $300 million on the portfolio of loans insured throughthis firm.”

Freddie Mac's earnings filing with the SEC said that FGIC hadinsured $2.614 billion in Alt-A and subprime loans as of the secondquarter. But the Freddie Mac spokesman declined to speculatewhether that may lead to further charges if other asset-backedsecurities insured by FGIC should show further deterioration andthe insurer is unable to meet its obligations.

FGIC is owned by Blackstone Group LP and PMI Group Inc. Its bondinsurance unit has backed $313.9 billion of securities, includingbonds issued by cities, states and school districts.

The company may seek to terminate contracts to guaranteecollateralized debt obligations backed by subprime mortgages, Fitchsaid in its statement July 31. Earlier on Thursday PMI Groupreported a second-quarter loss because the losses in its domesticmortgage-insurance operations more than offset higher internationalearnings.