Calculated Risk has a great post today, “‘Bailouts for UnterNerds: The Freddie Mac Story,” that says, in essence, that the “bailout” or “stabilization” for subprime mortgages announced by Freddie Mac today is much less significant and much less helpful to borrowers than it might seem.
Freddie Mac stated that it will be purchase $20 billion in new fixed rate and ARM products over the next two to five years. These new products are expected to have some terms that are more favorable to borrowers, but will have more stringent lending standards.
Calculated Risk stresses that what the press has tried to characterize as a bailout is anything but that, since it offers no relief to stressed borrowers. And the volume of lending that Freddie Mac planned to target to lower-credit quality borrowers is a drop in the bucket compared to the level of subprimes outstanding, so it isn’t clear how it would “stabilize” the market. Indeed, Freddie Mac’s indicated terms and practices for this market are more stringent than is characteristic for the subprime business, a posture consistent with earlier statements.
From Calculated Risk:
Yesterday was quite the day for the UnterNerds. It started for me with this item coming over the Bloomberg ticker:
Freddie Mac-FRE offers to buy $20B in home loans, CEO says-Bloo2007-04-18 12:15 (New York)Freddie Mac-FRE offers to buy $20B in home loans, CEO says-Bloomberg
At a summit in Washington, CEO Richard Syron said FRE is offering to buy as much as $20B of mortgages that were to be packaged into bonds as the company tries to help stabilize the subprime loan market.
This item apparently got a fair number of folks fired up about Freddie “bailing out” either subprime borrowers or the subprime industry. I couldn’t get that far, because I could not (and still cannot) figure out what the phrase “mortgages that were to be packaged into bonds” might possibly mean in whatever this context happens to be, which I don’t quite get either.
After an hour or two on Bloomberg.com, the story changed slightly. This is my copy/paste job from Update 1 of the story (which is no longer online):
Syron’s offer would effectively guarantee that there is demand from Freddie Mac for as much as $20 billion in new mortgage bonds so long as lenders refinance some of the loans outstanding into more favorable terms for subprime borrowers.
That seems to be saying that Freddie would buy loans–for MBS? for its portfolio? who knows?–that were refinanced by a customer of Freddie’s out of some toxic subprime loan. It’s no longer clear at this point what “subprime loan market” is being “stabilized”: the market for junk loans that we currently have, or a new market for more responsible refinances of those junk loans.
Oh well, it’s Bloomberg, so you get another update:
Syron’s program, scheduled to begin in July, would create demand from Freddie Mac for as much as $20 billion in subprime home loans, including refinancings with more favorable terms than existing mortgages. Freddie Mac plans to pursue the program for two to five years, Syron said in an interview.
Ah. So starting several months from now, Freddie is going to “stabilize” the subprime market by committing something like $4-10 billion a year for 2-5 years. Last year the subprime market was in the neighborhood of $450 billion. Perhaps that’s why the word “stabilize” dropped out.
By Update 3, this is about homeowners, not the subprime loan market:
April 18 (Bloomberg) — Freddie Mac, the second-largest source of money for U.S. home loans, plans to buy as much as $20 billion in subprime mortgages to help borrowers with poor credit histories avoid default and the loss of their homes.
“To the maximum extent possible we want to approach this from a market driven kind of approach,” Chief Executive Officer Richard Syron told reporters today at a housing market summit in Washington led by Senator Christopher Dodd.
By mid-day, Reuters was getting in on the act by reporting that:
The chief executives of mortgage finance companies Fannie Mae and Freddie Mac said that would each take steps to ease troubled subprime borrowers into more sturdy loans.
The nation’s two largest sources of mortgage finance said they could help borrowers with 40-year mortgages, looser lending standards and credit counseling services.
Looser lending standards? The same Freddie Mac who announced a few weeks ago that it was tightening standards for subprime purchases? That Freddie Mac? That’s certainly news; I wonder why it was buried so far in the story. You’d think it would be the headline, right? “Freddie backs off tightening, market shocked by about-face on subprime standards”?
Here’s Freddie’s actual press release:
McLean, VA – Freddie Mac (NYSE: FRE) today announced that it will purchase $20 billion in fixed-rate and hybrid ARM products that will provide lenders with more choices to offer subprime borrowers. The products, currently under development by the company and slated to be introduced by mid-summer, will limit payment shock by offering reduced adjustable rate margins; longer fixed-rate terms; and longer reset periods. . . .
The commitment follows Freddie Mac’s recent announcement that it will cease buying subprime mortgages that have a high likelihood of excessive payment shock and possible foreclosure. Among other things, the company will require that subprime adjustable-rate mortgages (ARMs) – and mortgage-related securities backed by these subprime loans – qualify borrowers at the fully-indexed and fully-amortizing rate. The company also will limit the use of low-documentation products in combination with these loans; require that loans be underwritten to include taxes and insurance; and strongly recommend that the subprime industry collect escrows for taxes and insurance, as is the norm in the prime sector…. The new $20 billion purchase commitment for model products using stronger underwriting standards builds on Freddie Mac’s long-term leadership in this arena.
So are we loosening or tightening here? I suppose it depends on whether you see these loans as lower-quality than what Freddie normally buys in its standard programs, which they are, or higher-quality than what subprime private investors and portfolio lenders have been originating, which they are.
The more interesting question is, will this $20 billion over 2-5 years be available “to help borrowers with poor credit histories avoid default and the loss of their homes”? How? It sounds to me like the program is trying to encourage current holders of toxic mortgages to refinance those loans, or current originators of subprime to originate new loans that are less toxic. Certainly that ought to reduce future defaults and foreclosures. But if anyone is assuming that it will do dog for borrowers currently facing foreclosure, I’d like to know what info they have that Freddie didn’t cover in its press release.
In any event, there’s an entirely new article (Update 1) up on Bloomberg, which now contains the following gem:
Many defaults “are occurring in the first few months after the loan was originated,” Syron said in testimony yesterday. “This suggests that many subprime borrowers have mortgages that should not have been made in the first place, at any price.”
Does this really sound to the rest of you like Freddie offering to “stabilize” the “subprime loan market”?