Freddie Mac to Purchase $71 Billion in Seriously Delinquent Loans

Freddie Mac today announced it would purchase "substantially all" of the seriously delinquent loans (+120 days) from their fixed-rate and adjustable-rate mortgage Participation Certificate (PC) securities.(These are the main MBS securities at Freddie Mac).

The company made the announcement Wednesday, saying that the decision to purchase the loans was a cost saving move based on criteria established in December 2007. 

At that time Freddie Mac said that it would, in the future, purchase loans that were 120 days or more delinquent at such time it was determined that the cost of guaranteeing payments to the holders of the securities, including advances of interest at the security coupon rate, exceeded the cost of holding the nonperforming loans in the company's mortgage related investment portfolio. 

Freddie Mac said that the delinquent loan purchases will help it preserve capital and reduce the amount of any additional draws from the U.S. Department of the Treasury. The purchases would not affect Freddie Mac's activities under the Making Home Affordable Program.

On January 1, Freddie Mac adopted new accounting standards for transfers of financial assets and the consolidation of variable interest entities, FAS 166 and FAS 167. These changes triggered the rules put into effect in 2007. READ MORE. As a result, the cost of purchasing most delinquent loans from PCs and holding them in portfolio will be less than the cost of continued guarantee payments to security holders.

The purchase will be effective after the close of business on March 4.  Holders of the fixed-rate PCs will receive principal payments on March 15 and ARM PC holders will be paid on April 15.

As of December 31, Freddie Mac had:

• 258,500 loans in it fixed-rate PC pools that were 120+ days delinquent. Unpaid principal totaled $49.8 billion
  
•  72,894 in its adjustable-rate pools that were 120+ days  delinquent.  Unpaid principal totaled $19.1 billion
  

If Freddie Mac were to purchase "significantly all" of these, they would own $71.2 billion 120+ day in loans (including fixed rate 20s,40s, Balloons, and 4.0 coupons). This confirms fears that MBS investors should be expecting an increase in involuntary buyout related prepayment speeds.

Final purchasing decisions will be based on borrower activity through January 31 on applicable loans.

Starting in April, the company will disclose in its Monthly Volume Summary the number of loans in the PC pools that are 90 or more days delinquent in order to provide PC holders with additional information.

Freddie Mac will continue to review the economics of purchasing loans 120 days or more delinquent in the future and may reevaluate its delinquent loans purchase practices and alter them if circumstances warrant.

HERE are Freddie Mac PC Delinquency Rates

HERE is more technical perspective regarding the effect on prepayment speeds.