NEW YORK – Freddie Mac on Wednesday said it planned to buy substantially all loans that are delinquent 120 days or more from its fixed and adjustable-rate mortgage-backed participation certificate securities.
The move is a result of switching its accounting, as of Jan. 1, to conform to new accounting standards that require financial institutions to hold all performing and nonperforming loans on their books, and to do away with off-balance sheet vehicles.
The company said it is cheaper to buy and hold these nonperforming loans on its books than it would be to pay guarantee fees to security holders.
The mortgage-finance company didn't disclose the volume of its purchases, but said these transactions would show up in a report to be published March 4.
Initial analyst estimates put the unpaid principal balance on Freddie Mac's 120-days-plus delinquent loans at nearly $70 billion.
As an added benefit, Freddie Mac said the purchases will help to preserve its capital, and to reduce the amount it draws from the U.S. Treasury to sustain its operations. That is because the accounting-rule change has already required it to transfer all GSE loans to its balance sheet, and buying out delinquent loans won't necessitate a write-down to current market value.
Further, the company already holds reserves for its guarantee fee business and the incremental amount of reserves held for a buyout won't be very large, according to a note from Deutsche Bank.
Freddie Mac will have to raise capital to buy these loans, and this is expected to be done through the sale of its debt to investors and the sale of mortgage pools.
