(Reuters) - Mortgage giant Freddie Mac FRE.N is considering raising capital by selling as much as $10 billion in new shares to investors, The Wall Street Journal reported, citing people familiar with the matter.
The report comes after the U.S. Treasury and Federal Reserve announced a plan on Sunday to shore up the balance sheets and borrowing capabilities of Freddie Mac and sister company Fannie Mae FNM.N.
Such a share sale, which has not yet been determined, could forestall a full government rescue, the WSJ said.
Investors, sensing the need for these pillars of the U.S. housing market to raise capital -- and thereby diluting existing shares -- sent their stock prices down more than 60 percent this month alone.
The main buyers for any new-stock issues are likely to be existing shareholders worldwide, the paper said, citing one person involved in the discussion.
Any sale would have to offer a high rate of return to attract buyers, given the near-14 percent yield on Freddie's preference shares, the paper added.
At that rate even a $5 billion preferred-stock offering would mean a company payout of $690 million a year, reducing the money available to common-stock shareholders, cutting the value of those holdings and putting further pressure on the share price.
Shares in Asia extended losses to fall 1.1 percent on Friday after the newspaper report, which added to worries about the stability of the U.S. financial sector.
Shares of Freddie Mac and Fannie Mae have taken a beating this year as the companies face mounting losses due to delinquent borrowers, rising foreclosures and pressure to increase their exposure to the mortgage market as a way of stabilizing housing.
Shares of Fannie and Freddie surged 18 percent and 22 percent, respectively, on Thursday, after Freddie pulled off its second successful debt sale following the announcement of the U.S. rescue plan.
The shares were also helped by an emergency rule issued on Tuesday by U.S. securities regulators to limit certain types of short selling of shares in major financial companies, including Fannie Mae and Freddie Mac.
While the storm surrounding the companies appears to be easing, they still face mounting losses due to delinquent borrowers, rising foreclosures and pressure to increase their exposure to the mortgage market as a way of stabilizing housing.
Together, the companies own or guarantee more than $5 trillion in U.S. mortgages. They have lost more than $11 billion since June, and have predicted more losses to come.
Even if Freddie and Fannie survive in their current form, it is not clear if they will still be as willing to lend as much to the U.S. housing market as home prices continue to slump. The two companies finance about half of U.S. homes.
Reporting by Pratish Narayanan in Bangalore; Editing by Tomasz Janowski and Louise Heavens