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Freddie Mac to Refinance Loans
$20 Billion to Help Subprime Owners
By Dina ElBoghdady
Washington Post Staff Writer
Thursday, April 19, 2007; D01
Freddie Mac, one of the nation's largest mortgage investors, plans to buy about $20 billion worth of mortgages that would primarily refinance the loans of people in danger of losing their homes.
The McLean company is targeting the loans of subprime borrowers, who typically have blemished credit records or other factors that make them risky to lenders. Since the housing market softened, many such borrowers have missed payments and defaulted at record rates in parts of the country.
Freddie Mac's announcement followed the unveiling earlier this week of a similar campaign by its larger rival Fannie Mae, which plans to allow lenders to qualify more subprime borrowers for refinancing.
Richard F. Syron, Freddie Mac's chief executive, announced his company's plan at a Capitol Hill briefing yesterday. The goal is to buy fixed and adjustable-rate mortgages with more affordable terms, starting midsummer, he said.
The idea is that if more troubled borrowers could refinance their homes, they would not lose them, and if investors such as Freddie Mac are willing to buy these loans, lenders would be willing to make them.
Freddie Mac is allocating money to this troubled sector "because it's needed and because, quite honestly, it's a good business opportunity," Syron said in an interview. Considering that the average mortgage is $150,000, the $20 billion Freddie Mac has allocated would cover about 130,000 mortgages, he said.
Freddie Mac has not decided exactly what terms it will set for the loans it will buy. Fannie Mae's program, HomeStay, would allow lenders to refinance without having to wait until the borrowers clear unpaid bills on their credit reports. It also would stretch the loan term to a maximum of 40 years from the current 30-year limit. Fannie Mae has not placed a dollar amount on how many such loans it would buy.
Neither government-sponsored enterprise has gained approval for its plan from federal regulators.
The heightened activity comes as both companies face pressure to demonstrate that they perform a public service. The House Financial Services Committee, led by Rep. Barney Frank (D-Mass.), has passed a bill to tighten regulation of the companies and to require them to contribute to an affordable housing fund. Frank said the public has not received enough value in return for the commercial advantages Fannie Mae and Freddie Mac get from their government ties.
Individual lenders are also under pressure to stem foreclosures. Yesterday, big lender Washington Mutual said it will refinance up to $2 billion in subprime mortgages.
Freddie Mae and Fannie Mac, created to promote homeownership, do not lend money to borrowers. Rather, they invest in mortgages and usually package them into securities for sale to investors.
Neither company buys many subprime loans from lenders, but they are fairly active in investing in securities backed by such loans.
Freddie Mac plans to keep the loans affected by yesterday's announcement in its portfolio, Syron said. That way, it can launch the program quickly and alter loan terms if necessary, which is difficult to do if the loans are sold to investors.
The loans Freddie Mac buys under this program would not be limited to refinancing, though refinancing is the initial focus now that millions of people have adjustable-rate mortgages with low teaser rates that will soon spike.
Staff writer David S. Hilzenrath contributed to this report.
A Subprime Fix From Fannie and Freddie
Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) made progress on their recent word that they would offer new subprime products when top execs from each government-sponsored enterprise testified on Tuesday before the House Financial Services Committee.
Fannie discussed a new three-pronged initiative, dubbed "HomeStay." The program involves working with lender partners to help homeowners stave off immediate foreclosure through financial incentives and workout solutions, expanding lending options to help refinance subprime borrowers out of ARMs and into long-term fixed rate products, and counseling future homeowners about making appropriate mortgage choices.
Freddie spoke about restricting subprime investments, eliminating no-income, no-asset verification loans ("liar loans"), and urging subprime lenders to escrow borrower funds for taxes and insurance. The GSE also announced the midsummer introduction of more consumer-friendly subprime mortgages in the form of 30-year and possibly 40-year fixed-rate mortgages and ARMs with reduced margins and longer fixed-rate periods. Freddie also called upon regulation that ensures uniform and consistent consumer disclosures.
Going forward, a combination of increased consumer education and regulation restricting predatory practices is vital. Certainly, swapping out of an ARM and into a long-term fixed-rate mortgage makes sense for most subprime borrowers. But while these suggestions are commendable, they will not serve as a panacea for all existing subprime ills. With close to 2.4 million homeowners facing default on their subprime mortgages over the next several years, foreclosures will mount despite sensible refinancing options and increased financial awareness.
Nor should Fannie and Freddie be charged with curing the system. Given their blemished accounting records, the GSEs provide easy targets for retribution by politicians seeking to capitalize on public clamor for subprime reform. Fannie and Freddie should not bear this blame. In the same congressional testimony, Fannie counted less than 2.5% of its business as subprime, and Freddie reviewed a litany of unilateral, voluntary steps taken since 2000 to improve subprime practices.
As Congress continues to debate regulation of the mortgage finance giants, it would be wise to bear in mind that the missions of the GSEs is to enhance liquidity, stability, and affordability in the housing market. Fannie and Freddie demonstrate their commitment to that goal, and should not be regulated as a proxy for the irresponsible practices of certain subprime mortgage lenders. While internal housekeeping issues at Fannie and Freddie remain, one hopes that regulatory measures will not be imposed which will hamper their ability to responsibly and flexibly meet the needs of the market.