Freddie Mac will buy $300 million in mortgages for areas affected by Hurricane Katrina, an effort to ensure that Gulf Coast banks have money to lend home buyers and business owners as the region recovers, the company said yesterday.
The mortgage financing company's action illustrates how it can help in a crisis, said Freddie and other banking industry officials, and comes as Congress is considering legislation to tighten regulation of the company.
Freddie, along with larger rival Fannie Mae, was created by Congress to keep money flowing into the housing market by buying mortgages from banks and wrapping them into securities that are sold to investors.
Under the policy announced yesterday, Freddie will buy mortgage loans made between June 1 and Aug. 29 for properties in the Gulf Coast region. The mortgages were already slated for sale to Freddie, but the company's underwriting rules would have let it reject the mortgages following the storm.
Instead, it will buy those loans as planned and hold them for up to three years. Though loans secured by damaged or devalued property may be returned to banks after that three-year period, mortgage industry officials said the infusion of cash from Freddie will help the area bounce back.
Freddie's move also gives the company a chance to show how its practice of retaining some loans can be put to good use. Freddie's $677.8 billion investment portfolio has generated the majority of the company's profit in recent years but has created concerns that its size poses a risk to the financial system.
By taking on Katrina-related mortgages, the portfolio "is doing what it's supposed to do," said spokesman Brad German.
Critics of Freddie and Fannie, including the Bush administration, have complained that the companies' investment portfolio is too large and poses a risk to the financial system.
However, given the crisis along the Gulf Coast, administration officials supported Freddie's actions.
"I'm heartened to know that our partners are doing their bit to keep the home mortgage finance pipeline opened so we can accelerate the recovery in . . . these devastated communities," Housing and Urban Development Secretary Alphonso Jackson said in a news release.