Freddie Mac's new venture in "nonconforming" mortgages could prove to be a boon to the agency's business in mainstream mortgages.
Lenders and analysts said Freddie Mac is sure to pick up solid mortgages for itself while combing through the large and risky loans that lenders seek to sell through the new program.
Under the program, announced late last week, an affiliate of Countrywide Credit Industries will buy loans that don't meet industry norms but were reviewed with Freddie Mac software. The agency cannot buy loans larger than $207,000 or those of subprime credit quality.
The plan, experts say, could entice more lenders to use Freddie Mac's underwriting software and give Freddie access to many A-credit borrowers who have been mistakenly judged to have shaky credit and steered to higher- rate loans.
Freddie Mac and its rival, Fannie Mae, have identical privileges and responsibilities as government-sponsored enterprises chartered to support the market for investment-grade home loans to borrowers with low and moderate incomes. But Fannie Mae has consistently garnered 55% to 60% of that market, and observers believe Freddie Mac wants to break Fannie's hold.
The new program calls for the Countrywide affiliate, CWM Holdings, to hook up with Freddie Mac's loan underwriting system to purchase loans that are too large or shaky for Freddie Mac to buy.
How will that translate into more loans for Freddie Mac?
Analyst Gary Gordon of PaineWebber Inc., New York, said Freddie Mac expects to get first crack at borrowers with borderline credit who can squeak into Freddie Mac's loan pool but generally are siphoned off as subprime credits through inexact, intuitive underwriting.
Freddie Mac executives have said in recent months that they believe that up to one-quarter of borrowers now classified as subprime are actually good credit risks, as gauged by the agency's automated underwriting system. A Freddie spokeswoman said the agency would have no comment on the venture until a news briefing scheduled for today.
The system uses credit scores to quantify a borrower's credit history and is a more reliable measure than current underwriting rules to determine a borrower's willingness to repay debt, Freddie Mac executives believe.
Under the current system, "Freddie never got a shot at looking at those loans, and very possibly the underwriters were wrong," Mr. Gordon said.
By facilitating an electronic marketplace even for the loans it doesn't expect to buy, Freddie Mac "will presumably widen out the amount of loans it can buy," he said.
Lenders fully expect Fannie Mae to follow suit, but until it does so, Freddie Mac has an edge in the race to enlist users, they said.
"When you have a big player like Countrywide, it certainly helps the old marketing (effort) when they call on you to talk about such things," said Sam Lyons, senior vice president of mortgage banking at Great Western Bank, Chatsworth, Calif.
For one thing, Freddie's system will make it easier for mortgage bankers, who so far have shied away from the subprime market, to venture into its uncertain waters.
With Freddie's system making the underwriting decisions, and linking mortgage bankers to investors, the lenders - hungry for new profits and volume - are poised to make more of these loans, experts said.
Freddie's involvement in subprime lending, though less direct than in the conforming market, will make the two markets similar in other important ways, experts added.
Profit margins probably will grow slimmer as Freddie Mac's underwriting system quantifies the risk of such loans, making them more like commodities, and because Freddie Mac will siphon off the A-grade borrowers who currently get subprime loans, experts said.
The Freddie Mac program began as a pilot with Residential Funding Corp., a unit of GMAC Mortgage Corp., and another lender. The arrangement with CWM, which is publicly traded but managed by Countrywide, adds considerable weight to the program. It also led to heavy trading in CWM shares on Friday, Monday, and Tuesday.
The arrangement is nonexclusive, and other lenders with technological savvy are expected to join the system in coming months.