Monday, September 22, 2008
Fannie, Freddie Bought Subprime and Alt-A MBS
Sept. 22 (Bloomberg) -- Freddie Mac Chief Executive OfficerRichard Syron stood before investors at New York's Palace Hotelin May last year lauding his company's ``cautious'' avoidance ofthe subprime-mortgage crisis. What Syron, who was ousted last week, didn't say was thatFreddie Mac had been gorging on subprime and Alt-A debt. While itand the larger Fannie Mae bought the safest classes of themortgage-loan pools, Freddie's purchases totaled $158 billion, or13 percent, of all the securities created in 2006 and 2007,according to data from its regulator and Inside MBS & ABS. Fannie Mae of Washington and McLean, Virginia-based FreddieMac held $114 billion of subprime and $71 billion in Alt-A securities as of June 30, according to the companies. Subprimemortgages were given to people with poor credit scores. Alt-Aloans, which rank between subprime and prime, were made toborrowers with better credit who provided no proof of income,bought property for investment or took out so-called optionadjustable-rate mortgages. The biggest suppliers of the securities to Fannie andFreddie included Countrywide Financial Corp. of Calabasas,California, as well as Irvine-California-based New CenturyFinancial Corp. and Ameriquest Mortgage Co., lenders that eitherwent bankrupt or were forced to sell themselves. Fannie andFreddie were the biggest buyers of loans from Countrywide,according to the company. The companies said they were urged to increase purchases ofsubprime debt by the Bush administration. The Department of Housing and Urban Development said in 2005 that Fannie and Freddie should increase financing for low-income areas or moderate-income regions with high minority populations to 37percent of new business from 34 percent in 2001 through 2004. That rose to 39 percent last year. As they acquired subprime debt, Fannie and Freddie fed on mortgage-backed securities, rather than buying or guaranteeing individual loans, according to Judy Kennedy, chief executiveofficer of the National Association of Affordable Housing Lendersin Washington. The companies could have bought ``hundreds of billions ofdollars'' of loans made to low-income people by banks, some ofwhich were granted with terms that were equal to prime, saidKennedy, whose organization represents financial companiesincluding JPMorgan Chase & Co. of New York, Charlotte, NorthCarolina-based Bank of America Corp. and pension funds. Fannieand Freddie failed to buy $50 billion to $90 billion ofapartment-building loans that would also have qualified, shesaid. The bonds Fannie and Freddie bought comprised thousands ofloans to borrowers with poor credit. The securities are split into pieces with varying risk and returns. Fannie and Freddie bought the safest of the top-rated pieces of the securities.Their yields of about 0.1 percentage points above the Londoninterbank offered rate made the debt less appealing to other investors, such as hedge funds or collateralized debt obligations, whose safest pieces were bought by banks. The lowestinvestment-grade classes offered yields of about 1.95 percentpoints over Libor. New Century, now the biggest subprime lender in bankruptcy,produced 24 percent. It created a security for Fannie and Freddiein August 2006. About 75 percent of the loans had interest ratesset to adjust to as high as 20 percent, mostly after two years,from an average of 8.3 percent. Countrywide, which faces investigations for fraudulentlending practices, supplied about 23 percent of Fannie's andFreddie's total loan volume in 2007, according to Credit Suisse. Terry Francisco, a spokesman for Bank of America Corp.,which bought Countrywide for $2.5 billion in stock in July,declined to comment.