Freddie Developing System, Staff for Push In Subprime Market

Freddie Mac is markedly expanding its activities in subprime lending, a move that could bring more lenders into the fastest-growing segment of the mortgage market.

The government-sponsored enterprise says it will soon make available to hundreds of lenders an automated system to help them get into the subprime business. The system will evaluate so-called B and C loans, which are made to borrowers with blemished credit records.

Freddie Mac, formally the Federal Home Loan Mortgage Corp., has also launched a hiring drive to build a unit with expertise in the subprime area. The company wants professionals with underwriting, origination, secondary marketing, and strategic planning experience, according to a classified advertisement in the Dec. 15 issue of The Washington Post.

Freddie Mac is hiring to support the expansion of its automated underwriting system, said spokeswoman Sharon McHale. She declined to say how many hirings were planned.

The steps represent Freddie Mac's most significant foray yet into B and C lending, an area that provides potentially higher profits to lenders for assuming greater risks. The market has doubled since 1994, to an estimated $100 billion this year.

Freddie Mac officials say the agency will serve only on the fringes - with assistance in underwriting and other support. Ms. McHale said Freddie Mac will not be getting directly into lending.

Still, for competitive reasons, some industry observers are nervous about Freddie Mac's edging into B and C lending and are looking to Capitol Hill for relief.

Freddie Mac's B and C activities haven't slipped below Congress' radar. A spokesman from the office of Rep. Jim Leach, R-Iowa, said the House capital markets subcommittee was considering holding hearings on the topic. "It has raised some eyebrows," he said. "Congress is aware of the concerns."

Specifically, heads of subprime companies say that Freddie Mac, by expanding its subprime activities, is overstepping its charter.

Freddie Mac's charter does not say definitively what kind of involvement the agency may have, Ms. McHale said.

"It states we can only purchase investment-quality loans," she said. "It doesn't specifically say" anything about A, B, and C loans.

"Personally, I think they ought to stay on their original mission, to provide housing," said J. Terrell Brown of United Companies, Baton Rouge, La.

Subprime loans, Mr. Brown said, are usually taken on for debt consolidation, rather than homebuying.

Some on Wall Street have also emerged as critics of Freddie's expansion plans. Bond insurers, who provide wraps, or guarantees, for pools of subprime loans, stand to lose significantly if Freddie enters the market in a big way, executives at these firms said.

"Any area that (Freddie) moves into, they are going to crowd out private-sector capital," because of their government sponsorship, said Robert Cochran, president and chief executive of FSA, a New York-based insurer.

Freddie Mac's plan is to expand to all 325 users of its loan prospector system the ability to underwrite subprime loans, Ms. McHale said. Additional lenders would be given the service as they signed on. All would be connected with companies that can help them sell their loans on Wall Street.

The move follows a test run this year in which Freddie Mac encouraged a dozen lenders to use the loan prospector program to underwrite B and C credits.

To be sure, Freddie Mac is not alone in the subprime market. Fannie Mae, since last year, has placed its guarantee on several packages of securities that include subprime loans.

The guarantees automatically gave the securities a triple-A rating, the industry's highest.

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