Freddie Mac, the second-largest U.S. home funding company, said Monday it has adopted guidelines that may reduce the number of delinquent loans it purchases from mortgage pools, easing stress to its capital base.
The new rules expand criteria that must be met for buying loans in arrears out of its mortgage securities, the McLean, Virginia-based company said in a statement.
The move is expected to cut the need for extra capital since the company's mortgage bond guarantee obligations require less backing than loans owned in portfolio.
Freddie Mac's policy shift comes after the company rattled investors last month with a $2 billion third-quarter loss, partly due to the purchase of $483 million in loans from its mortgage bonds, up from just $30 million in the period a year earlier.
Many of these loans that were 120 days delinquent still "cure" or get paid off, making them good collateral for the bonds, said Sharon McHale, a Freddie Mac spokeswoman.
"We think this will better reflect the behavior of delinquent loans," she said. It will, at least initially, reduce the repurchases, she added.
Delinquencies Expected to Rise
Freddie Mac at the end of November raised $6 billion in capital via a preferred stock offering. Expectations that delinquencies on loans will rise this quarter, and into 2008, also led the company to raise capital to continue meeting requirements of its federal regulator, the Office of Federal Housing Enterprise Oversight.
OFHEO mandates Freddie Mac to hold a minimum capital of 2.5 percent of on-balance sheet assets and capital of 0.45 percent of off-balance sheet obligations, such as guarantees on mortgage-backed securities.
Freddie Mac must hold 30 percent excess over its minium after its 2003 accounting scandal.
Freddie Mac said it would purchase delinquent loans of 120 days or more under the following circumstances: when they have been modified; a foreclosure sale occurs; and when mortgages are delinquent for two years; or the cost of guarantee payments to security holders exceeds the cost of holding nonperforming loans in its mortgage portfolio.
Previously, the company purchased all loans after they reached 120 days of delinquency.
The expected reduction in loan repurchases will be partially offset by greater expenses associated with delinquent loans, McHale said. The benefits will outweigh the costs, however, she added.