Freddie Mac-Fannie Mae to Blow Billions

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See stories at the overflow blog.
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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.

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A Subprime Fix From Fannie and Freddie

By S.J. Caplan

April 18, 2007

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.

New Century ends Freddie Mac ties

41 minutes ago

New Century Financial Corp. (Other OTC:NEWC - news), the troubled subprime mortgage lender, said on Wednesday it voluntarily terminated its relationship with Freddie Mac (NYSE:FRE - news), and that "several" of its own lenders plan to sell loans that had backed $17.4 billion of credit lines.

The Irvine, California,-based company also said it has entered agreements with regulators in Idaho, Iowa, Michigan and Wyoming to stop lending, following similar agreements with or orders from several other states.

The developments may move New Century closer to bankruptcy, an outcome many analysts already expect.

New Century disclosed the developments in a filing with the U.S. Securities and Exchange Commission. It did not immediately return a call seeking further comment.

The company had been the largest independent U.S. provider of home loans to people with poor credit before running into financial difficulties as delinquencies and defaults mounted.

New Century's decision to end its relationship with Freddie Mac means it cannot sell mortgage loans to or act as the main servicer of any mortgage loans for the mortgage financier.

Fannie Mae (NYSE:FNM - news), another mortgage financier, cut off its own ties with New Century earlier this month.

New Century's own lenders, meanwhile, are moving to preserve their own stakes in case of bankruptcy.

Earlier this month, Barclays Plc (BARC.L) took possession of $900 million of mortgages, while Morgan Stanley (NYSE:MS - news) said it is auctioning $2.48 billion of loans.

In afternoon trading, New Century shares fell 32 cents, or 22.7 percent, to $1.09 on the Pink Sheets.

Freddie Mac warns on subprime turmoil

By Daniel Pimlott in New York

Published: March 23 2007 12:44 | Last updated: March 23 2007 13:57

Freddie Mac, the US mortgage finance provider, warned that the turmoil in the subprime mortgage market was bound to spill over into consumer debt, as it revealed a loss in its fourth quarter.

Richard Syron, chairman and chief executive of the giant government-chartered group, said that following the massive expansion in the availability of credit for mortgage and borrowing-hungry consumers in recent years, the meltdown of the market for mortgages to people with patchy credit history could spread.

The rest of this article is for FT.com subscribers only

Freddie Mac Reports 3rd-Quarter Loss of $550 Million

(Update9)

By James Tyson

Jan. 5 (Bloomberg) -- Freddie Mac, the second-largest source of money for U.S. home loans, reported a $550 million net loss for the third quarter and had an undetermined loss in the fourth quarter as lower bond yields reduced investment returns.

The loss compares with net income of $880 million in the year-ago third quarter, the McLean, Virginia-based company said in a statement today. The results, which don't include per-share figures, are preliminary estimates as the government-chartered company continues a three-year overhaul of its accounting.

Freddie Mac, which owns or guarantees about 20 percent of the $10.5 trillion U.S. residential mortgage market, hasn't released timely financial reports since revealing in 2003 that it understated net income by $5 billion to minimize earnings volatility. The irregular earnings and a federal limit on the company's mortgage portfolio have discouraged investors.

``It's hard for us to buy stocks without solid financials,'' said Michael Mullaney, who manages $10 billion at Fiduciary Trust Co. in Boston, including 76,000 Freddie Mac shares. ``The delay in the reporting really hurts us from a fiduciary standpoint.''

Freddie Mac shares fell $1.02, or 1.5 percent, to $66.91 in New York Stock Exchange composite trading. The percentage drop is the biggest for the stock since Nov. 9.

The company won't provide results for the first quarter of 2007 until the second half of the year, Freddie Mac President and Chief Operating Officer Eugene McQuade said in an interview.

``Sometime in the second half of this year, we expect we would be able to get back to quarterly reporting,'' McQuade said. ``This is exactly what investors are anticipating.'' The company intends to provide 2006 results by the end of March.

Asset Losses

Fannie Mae, the larger rival to Freddie Mac, said last month it overstated earnings for 2001 through mid-2004 by $6.3 billion. The Washington-based company, which plans to file 2005 financial results by the end of September, hasn't said when it will restore timely reporting.

Both companies profit by guaranteeing mortgage securities and by holding home loans and mortgage securities in their portfolios. As interest rates fall, homeowners increasingly pre- pay their mortgages or refinance their loans, disrupting income from the companies' guarantee business.

Freddie Mac's third-quarter performance stemmed from $1.5 billion in pretax losses on derivatives and other assets and obligations, the company said.

The fair value of net assets attributable to shareholders failed to grow from the end of the second quarter because of the interest rate declines and a reduction in the difference between the company's borrowing costs and the yield on its investments, Freddie Mac said.

Reflection of Volatility

The results ``reflect the volatility we see quarter-to- quarter in response to movements in interest rates,'' Freddie Mac Chief Executive Richard Syron said in the statement. ``We face a challenging market environment.''

Freddie Mac's estimated net income for the first nine months of last year was $2.5 billion compared with $1.4 billion in the same period of 2005. The projected loss for the fourth- quarter of 2006 compares with net income of $684 million in the year-earlier period.

Derivatives are financial instruments derived from stocks, bonds, loans, currencies and other assets, or linked to specific events like changes in the weather or interest rates. Freddie Mac typically never realizes gains or losses from derivatives because it holds the instruments to maturity.

Accounting Costs

Freddie Mac spent $1.2 billion in the first nine months of last year fixing accounting and other administrative expenses, compared with $1.1 billion during the same period of 2005.

Fees related to personnel and the use of new technology primarily drove the increase in expenses, McQuade said. Such costs should stabilize ``in the next couple of years.''

The company plans by mid-2007 to finish installing new accounting systems for its mortgage portfolio and the management of its debt and derivatives, Chief Financial Officer Anthony Piszel told analysts on a conference call today.

``When they get installed, it dramatically reduces the overall risk environment that we operate in,'' he said. ``This is a little later than we initially planned.''

Freddie Mac also has reduced employee turnover to 8.5 percent in recent months compared with about 15 percent the previous year, McQuade said.

Mortgage Portfolio

Freddie Mac's portfolio of loans, which generates about two-thirds of profit, fell at a 0.2 percent annual rate in November to $704.3 billion. The assets declined at an annual rate of 0.9 percent from January until November. The portfolio rose 8.7 percent in 2005.

The Office of Federal Housing Enterprise Oversight in July required Freddie Mac to constrain quarterly growth of its mortgage portfolio to 0.5 percent beyond the June 30 level of $722.2 billion pending completion of improvements in accounting and corporate governance. Freddie Mac also must hold 30 percent more reserve capital than normal to ensure safety and soundness.

``Operational, accounting and systems weaknesses remain'' at Freddie Mac, Ofheo said in a Dec. 28 statement. ``Significant work remains before Freddie Mac becomes a timely financial filer and corrects the evident operational weaknesses.''

To contact the reporter on this story: James Tyson in Washington at at jtyson@bloomberg.net

Last Updated: January 5, 2007 16:16 EST