WASHINGTON -- Mortgage finance giant Freddie Mac, emerging from an accounting scandal, reported Friday it lost $480 million in the fourth quarter as a result of moves in interest rates that hurt its business of guaranteeing home loans.

The fourth-quarter loss by the government-sponsored company, which is the second-largest buyer and guarantor of home mortgages in the country, compared with profit of $684 million in the October-December period of 2005.

For all of 2006, Freddie Mac's earnings edged up to $2.2 billion from $2.1 billion in 2005 as income grew in the loan guarantee business. Earnings per share rose to $2.84 from $2.75 in 2005.

McLean, Va.-based Freddie Mac had previously said it expected a loss for the fourth quarter, with the company's financial results remaining volatile from quarter to quarter.

The business results for the full year improved "despite a challenging year for housing and mortgage finance," the company's chairman and chief executive, Richard Syron, said in a statement.

Amid the deteriorating market for so-called subprime mortgages -- higher-priced loans targeted to borrowers with tarnished credit or low incomes, Freddie Mac said last month that it will no longer buy those that it deems to be the most vulnerable to foreclosure. The change will take effect in September.

In the country as a whole, foreclosures and delinquencies have spiked in recent months, particularly among homeowners who took out the high-risk mortgages. The distress in subprime mortgages has roiled financial markets in recent weeks and stoked anxiety that it could spill over into the broader economy.

Freddie Mac said it experienced "a slight credit deterioration" in its overall mortgage holdings last year, as more loans for which payments were past due went into foreclosure. As a result, the company recorded a $297 million provision for credit losses.

Syron said Friday there could be some economic contagion from the turmoil in the high-risk mortgage market.

"I think that there might be some slight bleedover, but ... I don't expect that there'll be a great deal of effect," he said in a conference call with analysts. "I think that some of this will overflow into the broader economy as consumers become concerned about their debt burdens."

The National Association of Realtors reported Friday that sales of existing homes unexpectedly rose in February by the largest amount in nearly three years, but analysts expressed fears that the recovery for the battered housing industry will be slowed by the mortgage lending troubles.

Freddie Mac also said it continues to make progress on strengthening its internal financial controls in the wake of the accounting crisis. Its plan is to return to quarterly reporting of financial results later this year.

The company disclosed in mid-2003 that it had misstated earnings by some $5 billion -- mostly underreported -- for 2000-2002, and its top executives were ousted. Freddie Mac paid a then-record $125 million civil fine in 2003 in a settlement with federal regulators, who blamed management misconduct for the faulty accounting.

The company said it faces "a highly uncertain regulatory environment" with Congress considering legislation that would tighten the government's authority over Freddie Mac and its larger government-sponsored sibling, Fannie Mae. The legislation as written would allow federal regulators to order a reduction in the two companies' massive mortgage holdings -- a move "that could have a material adverse effect" on the business, Freddie Mac said Friday.

Freddie Mac and Fannie Mae were created by Congress to pump money into the $8 trillion home-mortgage market by buying home loans from banks and other lenders and bundling them into securities for sale on Wall Street.

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On the Net:

Freddie Mac: http://www.freddiemac.com

Fannie Mae: http://www.fanniemae.com

This story appeared in The Daily Herald on page D6.