FM Watch, the coalition of major lenders and mortgage insurers formed to confine Fannie Mae and Freddie Mac to the secondary mortgage market, said Freddie Mac's second-quarter earnings included a $1 billion writedown that could prove harmful for taxpayers.

The coalition said the $1 billion reduction by Freddie in the value of its asset-backed securities available for sale "reduced their shareholders' equity by 3% in just three months."

"This is not a financial loss in any way," said Bill Stephens, vice president for shareholder relations at Freddie Mac. "When we buy any security, we hedge the security" using debt, he said.

Mr. Stephens said this is an accounting issue resulting from $1 billion of securities that underwent a "mark-to-market change in the value of the assets." Wall Street analysts agreed that it is an accounting issue.

"Securities held for sale are marked to market, but the debt which funds these securities is not," said Jonathan E. Gray, an analyst at Sanford C. Bernstein & Co. Second-quarter writedowns of mortgage-backed securities were widespread among banks and thrifts; 90% of these financial institutions took some kind of writedown, he said.

"The mark-to-market equity account is only a one-sided rendering of the impact on the company's financial statements," Mr. Gray added.

FM Watch said the "unrealized loss was not related to Freddie Mac's mortgage-backed securities but to other asset-backed investments -- perhaps home equity securities -- that are not part of the GSE's core mission." But Freddie said that it often makes asset-backed investments as a short- term strategy before buying mortgage-backed securities. In this case, the assets were in Freddie's for-sale account and were "marked through shareholder equity, while liabilities are carried at cost," Mr. Stephens said.

FM Watch maintained that Freddie's shareholder equity was the only protection against a taxpayer bailout.

The $1 billion writedown led to a $331 million reduction in shareholder equity, it said.

The watchdog group said that higher capital requirements imposed by the Office of Federal Housing Enterprise Oversight -- Fannie's and Freddie's financial regulator -- would lead to lesser losses in shareholder equity for the two government-sponsored enterprises.

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