Fannie, Freddie Buying Fewer Bad Loans

The Associated Press
Tuesday, December 11, 2007; 7:16 AM

WASHINGTON -- Mortgage finance giants Fannie Mae and Freddie Mac are changing their criteria for purchasing delinquent home loans they've guaranteed, in order to reduce the number they buy from investors, the companies said Monday.

The two government-sponsored companies, which together own or guarantee around two-fifths of U.S. home-mortgage debt, have cut their dividends and sold billions of dollars of special stock recently to buttress their finances after posting stunning third-quarter losses.

Fannie Mae and Freddie Mac, its smaller competitor, have been forced to set aside billions of extra dollars to account for bad home loans, eroding their profits at a time when home prices are falling and defaults are spiking on high-risk mortgages made to borrowers with weak credit histories.

The companies customarily repurchased most mortgages once they were 120 days past due. Freddie Mac said it will now purchase delinquent loans that were part of larger securities issued by the firm when the mortgages are at least 120 days past due and either the mortgage has been modified, a foreclosure sale occurs, or the cost of payments to security holders exceeds the cost of holding the loans. It will also repurchase mortgages that are 24 months delinquent.

Brian Faith, a spokesman for Washington-based Fannie Mae, said late Monday, "We are undertaking the same steps."

McLean, Va.-based Freddie Mac said the move will help stem the erosion of its capital and will make its financial results more accurately reflect its "expectations for future credit losses."

Fannie Mae's intention to match Freddie Mac's move was reported online late Monday by The Wall Street Journal, which cited concerns among some financial analysts that the companies could use the new policy as a way to delay booking credit losses.

Fannie Mae recently imposed a 0.25 percent fee on all new home loans it buys or guarantees, and both companies have begun adding surcharges on loans to borrowers with credit scores below 680 and who are borrowing more than 70 percent of the home's value.

The two companies traditionally have been a major source of funding for the home-loan market by buying up mortgages made by banks and other lenders and then bundling them as securities for sale to investors. Industry experts say a reduced role by either could ripple across the housing market.

Fannie last month reported a third-quarter loss of $1.4 billion, while Freddie lost $2 billion in the same period.


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