Freddie to Sell Reference Bills - Analyst Blog

On Friday, Reuters reported that Freddie Mac (FRE) will sell $3 billion reference bills on June 28. These reference bills securities are unsecured general corporate obligations, providing the company short-term debt for maturities ranging from one month to one year.

Freddie’s reference bills consist of two offering: $1.5 billion three-month bills maturing on September 27, 2010 and $1.5 billion six-month bills maturing on December 27, 2010. Both these bills are expected to be sold on June 28 and will be settled on June 29.

Freddie’s reference bills are to be sold in a Dutch auction over the internet. In such auctions, rather than paying the actual price as in a multiple auction, winning bidders are required to pay only the lowest accepted bid price. The authorized dealers are only eligible to accept these bids.

Last week, Freddie had sold $3.5 billion of reference bills at lower rates compared with the recent sale of identical bills.

Since September 2008, Freddie is under government control with almost 80% being owned by US taxpayers and is placed under the conservatorship of The Federal Housing Finance Agency (FHFA). Freddie mostly acquires mortgages and mortgage-related securities from primary market institutions such as commercial banks as well as savings and loan associations, providing liquidity in the secondary mortgage markets without lending directly to homebuyers.

Freddie’s first quarter 2010 net loss came in at $2.06 per share, substantially lower than the Zacks Consensus Estimate of a loss of $2.45. This also compares favorably with a net loss of $2.39 in the prior quarter. Though provision for credit losses showed some improvement over the prior quarter, it remained at an elevated level as the credit market continued to deteriorate due to challenging economic conditions.

Earlier this month, the regulators of Freddie and its closest peer, Fannie Mae (FNM), announced that having failed to maintain listing standards with lower-than-minimum price requirements, these companies will no longer be allowed to trade their shares on the New York Stock Exchange (NYSE). However, according to the companies, the shares would trade in the over-the-counter market.

With the sale of these reference bills, Freddie is expected to receive short-term finance that will be beneficial for the company. We expect the reduction in liquidity and the widening of spreads to continue in the coming quarters considering that the U.S. housing market, though showing some early indications of stabilization, will likely remain under pressure through the remainder of 2010.

However, we do foresee Freddie’s increased participation in the Making Home Affordable (MHA) Program, potentially reducing losses from foreclosures in the upcoming quarters. With some early signs of stability in the housing market, Freddie anticipates that low mortgage rates, relatively high affordability and the homebuyer tax credit will fuel the recovery in the upcoming quarters.