Freddie Mac to Limit Purchase of Delinquent Loans

December 10, 2007 No Comments »

Mortgage financier Freddie Mac announced Monday that it would put greater restrictions on the types of delinquent loans it buys from mortgage pools.

Under the new guidelines, Freddie Mac will only purchase delinquent loans 120 days or more overdue if they meet certain criteria.

These include: if the mortgages have been modified; if a foreclosure sale occurs; if the mortgages are delinquent for two years; or the cost of guarantee payments to security holders exceeds the cost of holding nonperforming loans in its mortgage portfolio.

Previously, the company typically purchased all loans from mortgage pools shortly after they were delinquent for 120 days, but Freddie said it believes many of these loans often result in a cure or prepay rather than foreclosure.

“Allowing the loans to remain in PC pools will provide a presentation of its financial results that better reflects Freddie Mac’s expectations for future credit losses,” the company said in a statement.

Freddie Mac, a government-sponsored entity, buys mortgage pools from mortgage lenders and securitizes them into guaranteed Mortgage Participation Certificates, or PCs, which are then sold to investors on the secondary market.

The changes should reduce the need for additional capital because the company’s mortgage bond guarantee obligations require less backing than loans owned in its portfolio.

“Taking this action will also have the effect of reducing the company’s capital costs. The expected reduction in capital costs will be partially offset by, but is expected to outweigh, greater expenses associated with delinquent loans.”

Last month, Freddie Mac reported a $2 billion third-quarter loss, including $483 million in losses on loans purchased from its mortgage bonds, forcing the GSE to cut its dividend and raise capital through the sale of preferred stock.

Shares of Freddie Mac, which have been battered this year, were down 5 cents, or 0.14%, to $35.49 in midday trading, far below their 52-week high of $69.75.

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