* Freddie Mac reports much smaller-than-expected loss

* Company to raise $5.5 billion in new capital

* Shares rise sharply on growth outlook

By Al Yoon

NEW YORK (Reuters) - Freddie Mac (FRE.N: Quote, Profile, Research) posted a smaller-than-expected quarterly loss on Wednesday and the second-biggest U.S. home-finance company said it would raise capital to expand, sparking a rally in its shares.

Freddie Mac narrowed its first-quarter loss as a result of a change in how it accounts for mortgages it guarantees. That helped offset deeper credit losses suffered as more borrowers defaulted on loans.

Investors snatched up Freddie Mac shares after Chief Financial Officer Buddy Piszel said the company has "greatly reduced" the risk of losing money, and new capital will be available for growth in higher margin investments and guaranty business where fees have risen. The company said it doesn't expect more dividend cuts.

The results showed Freddie Mac has strengthened its ability to support the crumbling U.S. housing market that many economists say is tipping the economy into recession.

Last week, rival government-sponsored enterprise Fannie Mae reported a massive loss and cut its dividend. The two companies chartered to raise money for housing own or guarantee nearly half of all U.S. home mortgages.