Freddie Mac to Purchase $71 Billion in Seriously Delinquent Loans

by devteam February 10th, 2010 | Share

Freddie Mac today announced it would purchase “substantiallyrnall” of the seriously delinquent loans (+120 days) from their fixed-rate andrnadjustable-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 tornpurchase the loans was a cost saving move based on criteria established inrnDecember 2007. 

At that time Freddie Macrnsaid that it would, in the future, purchase loans that were 120 days or morerndelinquent at such time it was determined that the cost of guaranteeing paymentsrnto the holders of the securities, including advances of interest at thernsecurity coupon rate, exceeded the cost of holding the nonperforming loans inrnthe company's mortgage related investment portfolio. 

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

On January 1, Freddie Mac adopted newrnaccounting standards for transfers of financial assets and the consolidation ofrnvariable interest entities, FAS 166 and FAS 167. These changes triggered thernrules 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.

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

As ofrnDecember 31, Freddie Mac had:

  • 258,500 loans in it fixed-rate PC pools that were 120+ days delinquent. Unpaid principal totaled $49.8 billion
  •  72,894rnin 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 decisionsrnwill be based on borrower activity through January 31 on applicable loans.

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

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

HERE are Freddie Mac PC Deliquency Rates

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About the Author


Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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