WASHINGTON - Freddie Mac, whose credit standards have long helped define high-quality mortgages, is starting to tiptoe into the lower end of the market.
The government-sponsored mortgage company has launched a joint venture with Standard & Poor's Corp. to help lenders evaluate B and C mortgages - loans to people with blemished credit histories.
The move, some observers say, could be a prelude to the agency's buying and securitizing such loans. And in any case, the new service is almost sure to accelerate the growth of the B and C market, already one of the hottest sectors of mortgage finance.
"Two decades ago, Freddie Mac and others standardized the way conventional mortgages were originated," said David Glenn, Freddie Mac's president. Now, Freddie Mac wants to do that for all mortgages, he said.
The new venture comes as a growing number of banks, thrifts, and mortgage companies are venturing into the B and C market in search of new customers and additional revenues. Unlike grade A mortgages - the staple of Freddie Mac and its chief rival, Fannie Mae - B and C loans are made to borrowers with credit blemishes ranging from a few late payments to bankruptcy.
Traditionally the domain of finance companies, these loans have attracted a range of other lenders over the past two years as the end of a historic refinance boom left many companies starved for loan volume. In most cases, the loans are repackaged as securities and sold to investors.
Freddie Mac, formally the Federal Home Loan Mortgage Corp., says its evaluation venture is aimed at improving service to the lenders it serves. The plan is that lenders will be able to run their B and C loans through Freddie Mac's automated underwriting system. That will allow the lenders to give quick approvals to consumers, and it will provide lenders information for themselves such as the likely cost of credit enhancement.
Freddie Mac also will make the service available for jumbo mortgages - loans larger than the $203,150 maximum that the agency is allowed to buy.
Market sources say that Freddie Mac has been circling the subprime market for some time in search of securitization deals. But the agency denies it is interested in such deals.
Fannie Mae, formally the Federal National Mortgage Association, made its first B and C deal last month. It securitized $150 million of loans to borrowers with poor credit histories that had been originated by Advanta Mortgage. The loans were insured by the Municipal Bond Insurers Association, which will take the first losses, thus upgrading the credit rating to triple-A.
Fannie Mae, however, says it has no interest in broader involvement in subprime credit.
"Our focus will remain on A paper. Lower-grade credit is not part of our plan," said Fannie Mae spokesman David Jeffers. "We may do transactions in lower grades but will always consider credit enhancements."
Freddie Mac plans to test its new underwriting venture with two lenders: Residential Funding Corp., Minneapolis, and Innovative Mortgage Solutions, San Jose, Calif. The product will become more widely available next spring.
Mr. Glenn, the Freddie Mac president, said he hopes the move will help standardize subprime and jumbo mortgages and reduce costs for consumers.
For those mortgage bankers just now trying to diversify into B and C lending, Freddie Mac's innovation might make it easier to do so by taking some of the uncertainty out of the underwriting decision.
The demand for securities backed by subprime loans could increase, experts say, because investors would have more consistent and precise information about the loan pools.
