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By Jody Shenn

Dec. 10 (Bloomberg) -- Freddie Mac, the second-biggest U.S. mortgage-finance company, said it will limit purchases of delinquent loans from pools underlying the mortgage-backed securities it guarantees to help preserve capital.

Freddie Mac will buy loans that are 120 days or more delinquent when they've been modified, a foreclosure sale occurs, or borrowers don't catch up within 24 months, the McLean, Virginia-based company said today in a statement. The government- chartered company had generally purchased all of the mortgages shortly after they reached 120 days late, a practice it says unfairly depressed financial results under accounting rules.

``This change will reduce the pace at which loans are purchased from pools and therefore reduce the amount of losses that Freddie Mac will be required to realize in the near term,'' Brett Rose, a bond analyst in New York at Citigroup Inc., wrote in a report today.

Freddie Mac, which owns or guarantees one in five U.S. residential mortgages, is under pressure to shore up its balance sheet after reporting a record $2 billion loss in the third quarter. The loss reduced its capital to $600 million above a government-mandated minimum, prompting the company to sell $6 billion in preferred stock and slice its dividend in half.

Higher Expenses

The change will better reflect expected ``future credit losses,'' Freddie Mac said in the statement. 

It also will generate greater expenses associated with delinquent mortgages, primarily from the need to advance interest and principal on more loans to bondholders, said spokeswoman Sharon McHale. Under the new plan, the mortgages may also be bought if the cost of such payments exceeds the expense of holding the loans, Freddie Mac said in the statement.

The share of all home loans with payments more than 30 days late rose to a seasonally adjusted 5.59 percent last quarter, the highest since 1986, the Washington-based Mortgage Bankers Association said last week.

Buyouts of delinquent loans create prepayments that typically help mortgage-bond investors who bought the securities below their face value, while harming owners who acquired the debt for more. Bondholders will see a ``slight drop'' in prepayment speeds, Citigroup's Rose wrote.

Fannie Mae, the largest source of money for U.S. home loans, last week cut its dividend 30 percent and sold $7 billion of preferred stock to shore up capital.

The practice of buying loans from the pools when they become 120 days delinquent doesn't reflect the pattern of recovery for all of the loans, many of which don't end in foreclosure, Freddie Mac said in the statement.

Third-Quarter Writedown

The company's third-quarter results included a $483 million writedown of delinquent loans purchased from bond pools. The company also recognized $109 million in gains in a reversal of such losses in the past, and $58 million in interest income from such loans that became ``re-performing.''

Chief Financial Officer Anthony Piszel said on a conference call last month that the markdowns reflected ``the severe market sentiment'' that's hurt prices for delinquent loans. The company has recovered about half of such losses since beginning to mark the loans to market last year, and expects a similar ratio in the future, he said.

Freddie Mac has tumbled 44 percent in two months. The stock fell 50 cents, or 1.4 percent, to $35.04 in composite trading today on the New York Stock Exchange.

The preferred shares Freddie Mac sold last month will pay an 8.375 percent fixed dividend for five years and then shift to the higher of 7.875 percent or 4.16 percentage points above the three-month London interbank offered rate.

Under their capital rules, Freddie Mac and Fannie Mae must hold 2.5 percent in reserve against un-securitized loans in their portfolios, compared with 0.45 percent against the securities they guarantee, which are off their balance sheets.