Mortgage lenders will swap $1.8 billion of their low-interest mortgages for an equal amount of easily sold securities of the Federal Home Loan Mortgage Corp., under a new program designed to help savings and loan corporations raise cash and to make more mortgage money available to home buyers.
The first auction of the swap program was held this week, and officials of the mortgage corporation, known as Freddie Mac, said response from mortgage lenders in the initial run "exceeded all expectations."
Potential demand for these swaps is so great that next year's transactions in Freddie Mac's securities could exceed the corporation's total sales of the instrument since 1971, officials predict. They said they plan to hold a swap auction once a month.
Under the swap program, mortgage lenders, mainly S&Ls, offer pools of low-rate mortgages to Freddie Mac, bidding a certain "spread" in the interest rate they are willing to pay to get the securities. The spread is the difference between the interest rate the mortgages will yield and the interest rate the securities yield. The spread is what provides Freddie Mac, a congressionally chartered business firm, with its profit on the transaction.
S&Ls are willing to pay the spread for the securities because the securities can be sold easily for cash, unlike the low-yielding mortgages.
About $2.5 billion in mortgages were offered by 199 institutions, almost all S&Ls, at the program's first auction. Freddie Mac had planned on making $1 billion in swaps but raised the level to $1.8 billion because of the strong response.
The accepted spreads ranged from 30 basis points to 62.5 basis points, or 0.3 to 0.625 of a percentage point.
Freddie Mac President Philip Brinkerhoff estimated that up to $25 billion in swaps could be made next year, if the corporation is successful in getting Congress to lift a limit on the level of older mortgages it can buy. Since 1971 Freddie Mac has sold about $21 billion of its securities.
The country's 4,400 S&Ls currently have $503 billion in outstanding mortgages, of which about two-thirds were lent at rates of less than 10 percent, according to the U.S. League of Savings Associations.