Freddie Advises that Credit Costs Could Rise.

MCLEAN, VA -- Freddie Mac's net income fell sharply from one year earlier during the second quarter as an increase in credit losses and markdowns of credit-related items pinched results.

Moreover, Freddie Mac said that it expects to see continued credit pressure in the third quarter, though Freddie Mac executives said on a conference call that they expect charge-offs to remain below the company's long-term historical average.

"We were not immune to market forces and we continue to take a cautious view toward housing conditions," said chairman and CEO Richard Syron in a conference call with investors and analysts.

"While I was an early bear on the housing markets, I was not bearish enough," he said later during the call. Freddie Mac now expects housing values nationally to be flat to negative this year and next year as well.

While Freddie Mac's quarterly results "continue to be bumpy," Mr. Syron said that the market is pricing risk more rationally, and that provides investment opportunities for the company.

Freddie Mac reported net income of $764 million, or $1.02 per share, in the second quarter. Net income was down 45% from the second quarter of last year, though it was up from the first quarter of this year when Freddie Mac reported a loss due to fluctuations in the fair value of assets.

While credit costs have begun to chip away at earnings, Freddie Mac said that net interest revenue from its portfolio was down only modestly compared to a year earlier, and guaranty fee income continued to grow.