Freddie Mac would isolate jumbo loans in MBS

LAS VEGAS Feb 6 (Reuters) - Freddie Mac, the second biggest provider of funding for U.S. residential mortgages, intends to keep jumbo loans out of its bread-and-butter mortgage bonds if given the authority to handle them, a Freddie Mac executive said late on Tuesday.

The company would package jumbo loans above the $417,000 conforming limit outside the so-called "to-be-announced," or TBA, bond market if Congress decides to approve its ability to purchase the loans as part of an economic stimulus plan, Mark Hanson, a vice president of mortgage funding at Freddie Mac, told Reuters.

By doing so, Freddie Mac would prevent jumbo loans from tainting what has become the most standardized and liquid market that finances U.S. homes.

The plan to increase eligible loans to $729,750 would change the characteristics of standard mortgage-backed securities since larger mortgages are more susceptible to refinancing and early repayment of principal to investors. Including jumbos in TBA bonds would push yields higher to compensate for increased interest-rate risk.

"It would have the effect of raising rates to borrowers, which is not the purpose of the stimulus plan," Hanson said while at the American Securitization Forum meeting in Las Vegas. "We would fence it off" from the TBA market, he said.

The TBA market allows investors to buy mortgage bonds backed by Freddie Mac and Fannie Mae before the actual security is created. Investors do not know details of loans in the securities, leading them to assume their bonds will be backed by loans with the worst characteristics.

Potential damage to the TBA market prompted Wall Street dealers to convene at least once with the Securities Industry and Financial Markets Association as it became clear Congress was not objecting to boosting loan limits for Freddie Mac and its larger rival, Fannie Mae.

The TBA market feeds the $4.5 trillion "agency" MBS market, which has been relatively steady as other, non-guaranteed, mortgage bonds backed by riskier loans have upended global credit markets.

Prices on some MBS have already been hurt as dealers anticipate a jump in supply. As much as $500 billion in jumbo loans could qualify, according to Barclays Capital.