The US mortgage finance empire Freddie Mac yesterday predicted the worst housing slump since the Great Depression as it set aside $2.5bn (£1.28bn) to cover credit liabilities caused by delinquent loans and foreclosures.

Two weeks after the US government hastily assembled a rescue package to support the business, Freddie revealed a second-quarter loss of $821m - a big jump in comparison with its first-quarter deficit of $151m.

Richard Syron, chief executive of Freddie Mac, said: "As we're all painfully aware, the housing correction has had a significant impact on the US economy." He admitted that the credit environment was deteriorating "even faster than we thought".

The government-sponsored company has a loan portfolio of more than $1.5tn. Along with its sister firm, Fannie Mae, it buys mortgages from lenders and securitises them on the financial markets in its mission to broaden access to home ownership.

Syron predicted yesterday that the American housing slump would be even deeper than anticipated. He said the company believed prices would drop by between 18% and 20% from their peak, exceeding its earlier forecast of 15%. In a statement, the company said it was "in the midst of the single largest decline in real estate values since the Great Depression".

Syron said: "Today's challenging economic environment suggests the housing market is far from stabilising. We now think we're about halfway through the peak-to-trough decline."

Alarm about the financial position of Fannie and Freddie has sent shares in the two companies plummeting by more than 80% this year. Freddie's loss, which was significantly greater than analysts had predicted, sent its stock down by 15% in early trading on Wall Street.

Freddie intends to raise $5.5bn of new capital to bolster its reserves and is slashing its dividend. The company insisted that its cash remained above regulatory targets - it has $37.1bn of core capital, which is $2.7bn more than the surplus required by the US government.

Congress recently nodded through a bill allowing the US treasury to lend money or buy shares in Freddie and Fannie to keep the businesses afloat. Economists fear that a collapse of one or both could have grave repercussions throughout the financial system. Between them, they back more than half of new US mortgages.

Syron said he did not believe such drastic taxpayer support would be needed: "While we do not expect to draw on any of the new backstops going forward, they provide important sources of reassurance and potential support in the event that the housing market declines even further than anticipated."

Analysts believe investors are likely to attach stringent terms to any fundraising by the company. Walter O'Haire, of the Boston financial consultancy Celent, said: "What will be interesting to see are the terms investors will demand in return for buying into Freddie Mac's proposed $5.5bn stock offering."