New accounting rules have made it more cost-effective for Freddie Mac to re-purchase seriously delinquent loans from its securitizations than to wait until final disposition.
In a statement today, the McLean, Va.-based company said it will re-purchase substantially all fixed- and adjustable-rate mortgages that are 120 days or more delinquent from its participation certificate securities.
The loan purchases will help the government-controlled enterprise preserve capital and reduce reliance on the U.S. Department of the Treasury for ongoing capital.
In December 2007, Freddie said it would hold off on re-purchasing some delinquent loans from MBS investors. At the time, it noted it would re-purchase mortgages that were at least 120 days delinquent when they had either been modified, become real-estate owned, been delinquent for 24 months or when the cost to guarantee the delinquent loans exceeded the cost of holding them in its mortgage portfolio.
Now, the cost to guarantee payments to security holders, including advances of interest at the security coupon rate, exceeds the cost of holding the nonperforming loans in its portfolio — prompting Freddie to reverse its strategy.
The opportunity cost has changed as a result of new accounting standards, SFAS 166 and SFAS 167, which were adopted by the secondary lender on Jan. 1.
Changing economics also impacted Freddie’s decision.
