Some of the slack in the credit market has been taken up by the government chartered mortgage finance companies Fannie Mae , Freddie Mac and Ginnie Mae. The three firms have securitized $692 billion in home mortgages through June, putting them on track to match, approximately, the $1.2 trillion they securitized in 2007, according to Inside Mortgage Finance, a financial trade publication.
But prices for these securities have fallen in the last two months, despite the backing of the government companies and initiatives by Congress and the Treasury to create a stronger government safety net for Fannie Mae and Freddie Mac.
The two companies, which reported big losses last week, have said that they might reduce or slow the amount of large loans they buy from banks, a signal that two giants that had been big buyers might become sellers. If so, that would lower the price of mortgage securities even more, raising the cost of borrowing for home buyers.
Because those developments have damped the private mortgage market, the Treasury Department has sought to revive activity by encouraging the use of covered bonds, which have been a popular investment in Europe.
Unlike a mortgage security, the home loans that back a covered bond stay on the issuing bank’s balance sheet. If loans default, banks replace them, making the bonds less risky to investors but more so to the banks. In July, four big banks — Bank of America , Citigroup , JPMorgan Chase and Wells Fargo ; said they would issue covered bonds.
But before jumping in wholesale, investors say they want to know more about the quality of loans backing the bonds and see more detailed federal rules about how the bonds will be handled if banks fail.
“It may be a step in the right direction,” said Daniel O. Shackelford, a bond portfolio manager at T. Rowe Price, the mutual fund firm. “But I am not sure it will solve all the problems.”
Some New York Loans Shunned
Freddie Mac said Tuesday that it would stop buying subprime loans issued in New York State as a new law takes effect that holds investors accountable for mortgage fraud.
Freddie will not buy loans dated on or after Sept. 1 that meet the state’s subprime definition, the government-chartered company said in a lender bulletin on its Web site. Gov. David A. Paterson of New York signed new foreclosure and lending laws last week that tighten legal protections for borrowers.
The legislation holds mortgage buyers like Freddie liable in ways that “we have no way of monitoring and preventing,” Brad German, a company spokesman, said.
The state law may disproportionately affect borrowers looking to use state and federal mortgage rescue programs to refinance out of unaffordable subprime loans, Mr. German said, but he said it would affect a “very, very small number” of loans.
A spokeswoman for Governor Paterson, Erin Duggan, had no immediate comment.