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Freddie Mac Increases Support for Ailing Home Loan Market

By Zachary A. Goldfarb
Washington Post Staff Writer
Tuesday, November 25, 2008

Freddie Mac increased its support for the nation's ailing home loan market in October, in part playing the role the government desired when it seized the mortgage finance giant.

The McLean-based company and its bigger sibling, Fannie Mae of the District, are two vital cogs in the nation's mortgage market, buying loans from lenders, insuring them against default and supplying fresh cash to make more loans. Some of these loans are sold to investors; others are kept by Fannie and Freddie. Under severe financial pressure, Freddie -- and to a lesser extent, Fannie -- pulled back last summer from its purchases of pools of these home loans known as mortgage-backed securities.

The company said yesterday that it bought $27 billion in mortgage-backed securities in October, growing its portfolio at an annual rate of 44 percent. The company's portfolio now stands at $764 billion; it may grow to $850 billion by the end of next year under the government's plan.

The purchases by Freddie -- and Fannie, which hasn't released its October data yet -- may have kept mortgage rates from skyrocketing amid the credit crisis. But they haven't reduced them, one of the goals of the government takeover.

One reason: The companies' debt costs -- what they pay to borrow money, which they then use to buy mortgage-backed securities -- have been rising. Those higher costs are passed on to borrowers.

"Freddie accelerated around corners last month to rebuild its balance sheet in a major catch-up move," Jim Vogel, an analyst at FTN Financial, wrote in a research note. "That it could do this . . . in a tough market is a minor positive for the mortgage market."

However, there were a few warning signs. Freddie's business of pooling mortgage loans, guaranteeing them and selling them to investors contracted slightly last month -- the first time that's happened in years. This business is much larger than its portfolio business, suggesting that lenders are making fewer home loans and private investors are growing more reluctant to buy mortgage securities.

Freddie also shifted dramatically toward using short-term debt to fund its operations, issuing $58 billion. Freddie has not been able to issue much long-term debt as doubts about its future and chaos in the credit market make investors reluctant to lend it money for any more than a one-year term. Analysts say short-term debt must constantly be repaid and exposes Freddie to risks, such as wide fluctuations in interest rates that might make it difficult to raise new funding as some debt matures.

Delinquencies on loans guaranteed by Freddie Mac also accelerated in October, rising to 1.34 percent from 1.22 percent in September.

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