Freddie Mac to Refinance Loans

Barney Frank (D-Mass.) says the public has not received enough value from Fannie Mae and Freddie Mac.
Barney Frank (D-Mass.) says the public has not received enough value from Fannie Mae and Freddie Mac. (By Carol T. Powers -- Bloomberg News)
By Dina ElBoghdady
Washington Post Staff Writer
Thursday, April 19, 2007

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.

© 2007 The Washington Post Company