(Recasts, adds Fannie Mae buyouts, funding focus)
By Lynn Adler
NEW YORK Feb 10 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
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,"
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
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
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
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)