Wednesday, February 10, 2010

Freddie Mac Will Buy Out 120-Day Delinquent Mortgages

Original posted on the Housing Wire by Diana Golobay:

Government-sponsored mortgage securitizer Freddie Mac (FRE: 1.17 -2.50%) said today it will buy “substantially all” mortgages delinquent by at least 120 days from the company’s related fixed-rate and adjustable-rate mortgage (FRM and ARM) Participation Certificate (PC) securities.

Freddie said the loan purchases will show up in the PC factor report published after March 4, 2010. The corresponding principal payments on affected PCs will pass through to FRM and ARM PC holders on March 15 and April 15, respectively.

“[T]he cost of guarantee payments to security holders, including advances of interest at the security coupon rate, exceeds the cost of holding the nonperforming loans in the company’s mortgage-related investments portfolio as a result of the required adoption of new accounting standards and changing economics,” Freddie said in the announcement today.

New Financial Accounting Standards (FAS) 166 and 167 affected the transfer of financial assets and the consolidation of variable interest entities. Essentially, the standards require financial firms to bring securitized assets onto balance sheets.

Because of the standards, it would be more expensive to maintain guarantee payments to security holders than simply purchasing most delinquent loans out of PCs and holding them in portfolio, Freddie said.

The company said it expects to report the number of loans 90+ days delinquent in related 15- and 30-year FRM PCs and in ARM PCs in the monthly volume summary by April 2010.

A Freddie Mac spokesperson did not return calls seeking comment on the dollar volume of delinquent loans affected by the announcement.

The US Treasury Department on December 24th announced it was raising GSE portfolio caps. The potential for voluntary buyouts of delinquent loans by GSEs also rose since the Treasury’s announcement, according to global financial services firm Credit Suisse. The firm said in early January a swift buyout of the entire delinquent pipeline was possibly in the works. Since then, the industry has kept its eyes and ears open for a surge in delinquent buyouts.

The Federal Reserve is wrapping up $1.25trn of mortgage-backed securities (MBS) purchases from Freddie, Fannie Mae (FNM: 0.9781 -0.19%) and Ginnie Mae. Analysts have suggested private capital will not fill in for the Fed’s demand soon.

The Fed has considered extending and expanding asset-purchase programs, including the MBS program, if its exit this quarter is not replaced with private investor demand, causing MBS spreads to treasuries to blow out again.

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