UPDATE 3-Freddie, Fannie escalate delinquent loan buyouts

Wed Feb 10, 2010 3:52pm EST

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(Recasts, adds Fannie Mae buyouts, funding focus)

By Lynn Adler

NEW YORK Feb 10 (Reuters) - Freddie Mac FRE.NFRE.P and Fannie Mae FNM.NFNM.P, the largest buyers of U.S. home loans, said on Wednesday they were ramping up purchases of delinquent loans from mortgage securities pools to bolster their financial positions.

Both companies, seized by the government in September 2008, said this action would help cut funding costs and preserve capital, limiting the amount of added taxpayer funds they need.

The cost of buying most of the delinquent loans backing mortgage securities and holding them in their own portfolios will be less than the cost of advancing payments on the non-performing loans to investors, both companies said.

Freddie Mac has tapped the government for more than $51 billion in taxpayer funds as of the third quarter of last year, roughly $10 billion less than has its sibling, Fannie Mae.

Freddie Mac said it would buy "substantially all" mortgage loans that are at least 120 days delinquent from its fixed-rate and adjustable-rate securities.

There were 331,394 loans in this category as of the end of December, with an unpaid principal balance just shy of $69 billion, Mark Hanson, vice president of mortgage funding at Freddie Mac, told Reuters in an interview.

Those numbers will be adjusted for January. After adjustments, "whatever is remaining of the investor balances for that population will be passed through as prepayments," Hanson said.

The buyouts "will help Freddie Mac preserve capital and reduce the amount of any additional draws from the U.S. Department of the Treasury," the company said. Fannie Mae made a similar statement.

Under new accounting standards, all loans that Freddie Mac and Fannie Mae guarantee went back on their balance sheets as of the start of January.

Fannie Mae said it has the option to buy out loans that are late by four or more straight months, estimating that to be about $127 billion of single-family loans as of Dec. 31.

The company expects to start the purchases in March and complete a significant portion within a few months, subject to market conditions and servicer capacity.

On Christmas Eve, the Treasury opened the credit access spigot to the two companies for three years.

The government is seeking to overhaul the structure of the two largest U.S. home funding companies after the housing crisis decimated their capital levels. But in the meantime, it relies on them to help lift the housing market out of its worst crash since the Great Depression.

The White House said on Feb. 1 that Fannie Mae and Freddie Mac would draw a total of $188 billion in government funds by October 2011. For details, see [ID:nN01191335]

The stepped-up buyouts of delinquent loans from their securities pools were widely expected, but market participants were concerned about the uncertain timing and pace.

"We announced it today trying to minimize market disruption and we elected to do it all at once so that future trading would have this uncertainty resolved," Hanson said.

Freddie Mac said it will continue to review the economics of future purchases of loans that are 120 days or more delinquent.

Mortgage bond prepayment speeds "will be materially faster for the February report, but this will allow for a more even approach to buying out newly delinquent loans going forward," FTN Financial analysts Walter Schmidt and Kevin Cavin wrote.

Predicting the pace of early mortgage bond repayment is critical for investors in gauging cash flow and planning for reinvestment.

Freddie Mac said it expects by April to disclose in its monthly volume summaries the number of loans at least 90 days delinquent in related fixed-rate 30-year, 15-year and ARM securities.

Fannie Mae said it would provide additional information on the impacted mortgage securities within two weeks.

Attention in the market has started to shift to how the companies will fund these purchases.

Earlier on Wednesday, Freddie Mac opted to skip its lone window for selling its so-called reference notes in February. That is one form of funding used by the company to finance mortgage bond purchases.

Yield premiums on bonds issued by the two companies were steady to narrower on Wednesday versus Treasuries. (Editing by Dan Grebler)

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