The Federal Home Loan Mortgage Corp., also known as Freddie Mac, yesterday announced a new multi-billion-dollar program aimed at bolstering the flagging savings and loan industry and at making more money available for home loans.
Freddie Mac will swap $2 billion of its easily sold securities through the end of the year for the burdensome low-interest home loans on the books of mortgage lenders.
The swap -- the largest program ever of this kind -- will enable S&Ls and other mortgage lenders to raise new money to make more mortgages and will turn a profit for Freddie Mac, the agency said. Because of the increased amount of mortgage money the plan is supposed to produce, interest rates also might be kept lower than they otherwise would be, Freddie Mac officials said.
"This is a free-market effort to make those low-interest loans more effective" for the lending institutions, Freddie Mac President Philip R. Brinkerhoff said at a press conference yesterday.
In addition, a larger, longer-range swap program to begin in 1982 is to be announced later.
Freddie Mac is a profit-making, congressionally chartered business that does not get any government funding. It makes money available for home loans by buying conventional mortgages from lending institutions and selling mortgage securities to investors.
The savings and loan industry is in a critical state, losing a flood of deposits to the higher-yielding investments that increasingly have become available to individual investors. The S&Ls have not been able to compete effectively for new funds and have been shackled by the mainly-low-interest mortgages on their books.
Banks and mortgage bankers also are eligible for Freddie Mac's program, but S&Ls are expected to be the main participants.
Each mortgage lender will put together a package of perhaps $100 million or more in mortgages and will exchange it for an equal amount of Freddie Mac securities called mortgage participating certificates (PCs).
The main advantage to the mortgage lenders is that the PCs are easily sold and turned into cash. Generally they are bought by pension funds and insurance companies, in minimum denominations of $100,000. This provides new money for more mortgage lending. In addition to the interest income on the new mortgages, the S&Ls would benefit from a larger mortgage portfolio because they would earn more servicing fees. The securities also can be used for collateral for borrowing money to make new loans.
If the S&L or other lenders held onto the PCs and interest rates dropped, they could make a profit by selling the securities, but if interest rates rose, they would have to take a loss on the sale.
Freddie Mac will make a profit on the exchange by paying one-quarter of a percentage point less on the securities than it receives in mortgage interest. For example, if Freddie Mac received a pool of 12 percent mortgages, it would give the S&L or bank an 113/4 percent return on the PCs.
Freddie Mac generally has bought new mortgages, but soaring interest rates and lack of mortgage money have brought new lending practically to a standstill, Brinkerhoff said. As the housing market declined, Freddie Mac looked for other ways to provide S&Ls and other mortgage lenders with an infusion of funds.
At the same time, Brinkerhoff stressed that the new program is not supposed to be a "bailout" for S&Ls.