Freddie Mac reported a narrower $2.5 billion third-quarter loss, the smallest shortfall in more than a year amid signs that mortgage delinquencies are slowing. But the company warned that delays in the foreclosure process could raise costs "significantly" and that losses also could rise amid a faltering housing recovery.

The third-quarter loss compared with a year-earlier net loss of $5.4 billion. While gains in the value of certain securities and derivatives left Freddie with a small cash surplus at the end...