Freddie Mac to Buy Back More than $71B in Delinquent Loans

""Freddie Mac"":http://www.freddiemac.com said Wednesday that it will purchase ""substantially all"" mortgages that are 120 days or more delinquent from the company's fixed-rate and adjustable-rate (ARM) mortgage Participation Certificate (PC) securities.

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The GSE said the decision to make these purchases stems from the fact that the cost of guarantee payments to security investors exceeds the cost of holding the nonperforming loans in the company's own portfolio, as a result of new regulations related to accounting standards for mortgage-backed securities (MBS).

According to ""Freddie Mac's data"":http://www.FreddieMac.com/mbs/docs/delinquencyrates, as of December 31, 2009, the aggregate unpaid principal balance of loans in PC securities that were 120 or more days past due was just over $71 billion. The buybacks will reflect borrower activity through January 31, 2010, the company said, so the number could go even higher.

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The GSE said its purchases of these nonperforming loans will be included in a report to be published March 4, and the corresponding principal payments will be made to fixed-rate and ARM PC holders on March 15 and April 15, respectively.

Freddie said the delinquent loan purchases will help the company preserve capital and reduce the amount of any additional draws on the GSE's line of credit from the U.S. Treasury. Freddie Mac noted that the purchases will not affect its activities under the administration's Making Home Affordable program.

In December 2007, Freddie Mac announced operational changes for purchasing seriously delinquent loans from PCs if the cost of guarantee payments, including advances of interest at the security coupon rate, outweighed the cost of retaining the loans.

On January 1, 2010, the GSE adopted new industry-wide accounting standards â€" FAS 166 and FAS 167 â€" which require lenders to account for certain securitized assets on their own books, rather than passing all the risk off to securities investors as has been the case in the past. It's a move that regulators say will ensure lenders have a vested interest in ensuring the loans are well underwritten and borrowers are able to keep payments current.

Under these new accounting rules, Freddie Mac determined it was more cost efficient to repurchase the delinquent loans and hold them in its portfolio than continue making guarantee payments to security holders when the losses showed up on the GSE's own books as well. The company says it will continue to review the economics of purchasing loans 120-plus days past due and alter its policies as circumstances warrant.