WASHINGTON–The financial troubles that mortgage finance company Freddie Mac revealed yesterday have been caused in part by the shaky condition of monoline mortgage insurer Financial Guaranty Insurance Company, sources said.

Freddie Mac took a $300 million charge against earnings, citing fears that an unidentified monoline mortgage insurer will not be able to pay expected claims on losses from securities backed by Alt-A and subprime loans.

It said in a Securities and Exchange Commission filing that there is a significant possibility that Freddie Mac will face continued adverse developments that could result in the company falling below capital levels mandated by the government.

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

Two sources with knowledge of the situation said the mortgage insurer mentioned as one source of Freddie Mac's difficulties is FGIC.

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

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

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

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

A spokesman for Freddie Mac would not identify by name the entity which had insured the asset-backed securities on which it took the write-off. The spokesman would only identify the entity as a “large monoline bond insurer that is in financial difficulty today.”

But a securities analyst in New York who asked not to be identified by name said it was most likely FGIC because it is a privately owned bond insurer, which makes it difficult to raise new capital.

The Freddie Mac spokesman said, “As a result of this weakened financial condition, we believe it is possible that they may not be able to meet their obligations and insure these bonds that they are providing coverage for us, so as a result we recorded an impairment of about $300 million on the portfolio of loans insured through this firm.”

Freddie Mac's earnings filing with the SEC said that FGIC had insured $2.614 billion in Alt-A and subprime loans as of the second quarter. But the Freddie Mac spokesman declined to speculate whether that may lead to further charges if other asset-backed securities insured by FGIC should show further deterioration and the insurer is unable to meet its obligations.

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

The company may seek to terminate contracts to guarantee collateralized debt obligations backed by subprime mortgages, Fitch said in its statement July 31. Earlier on Thursday PMI Group reported a second-quarter loss because the losses in its domestic mortgage-insurance operations more than offset higher international earnings.

Special Reports /

FGIC Called Part Of Freddie Mac Problem

Related Stories

Recommended For You