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'Piggyback' Loans Allowed by Freddie Fed Mortgage Risks
Freddie Mac chief executive Richard F. Syron cited the loan-to-value ratio in his 2006 letter to shareholders.
(By Emile Wamsteker -- Bloomberg News)
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"Our principal safeguard against credit losses for mortgage loans" -- apart from insurance and the like -- "is provided by the borrowers' equity in the underlying properties," Freddie Mac said in its annual report for 2003.
The relationship between loan size and property value, known as the loan-to-value, or LTV, ratio, is a key measure of loan quality. The company features it in its financial reports, and Syron, the chief executive, cited it in his letter to shareholders for 2006. However, the ratios the company reported over the years did not reflect the combined total of multiple loans on the same property.
Cosgrove, the company spokesman, said they weren't required to.
The company described the potential impact of second loans last month, devoting three sentences to the subject in an 81-page report on its latest financial results.
Including second loans, Freddie Mac estimated that about one in seven of the single-family mortgages it held on Sept. 30 had total loan-to-value ratios of more than 90 percent, compared with one in 20 if it excluded the piggyback loans.
"In general, higher total LTV ratios indicate that the borrower has less equity in the home at the time of origination and would thus be more susceptible to foreclosure in the event of a financial downturn," Freddie Mac said.
The company offered a reassuring note several months earlier in its annual report for 2006. Freddie Mac said loans with "lower levels of borrower equity" carried insurance or other financial backstops.
Freddie Mac executives said that point was framed in terms of the company's loan-to-value ratio, which excludes piggybacks, and not total loan-to-value, which includes them.
"I would chalk that up to less precision in the disclosure," Piszel said.
Piggyback loans became a point of contention in 2005, when a trade group for providers of mortgage insurance raised the issue in a letter to the Office of Federal Housing Enterprise Oversight, the government agency responsible for monitoring the financial soundness of Freddie Mac and Fannie Mae.
The two companies "have of late become major purchasers of first liens that are part of piggyback mortgages constructed solely to evade the charter requirement," Suzanne C. Hutchinson, executive vice president of Mortgage Insurance Companies of America, said in the letter.
Hutchinson urged the OFHEO to bar Freddie Mac and Fannie Mae from buying loans in piggyback arrangements where the combined loan-to-value ratio exceeded 80 percent.
