People with mortgages more than a year old may have credit or property-value problems that have prevented them from refinancing.
That's the reasoning behind a step Freddie Mac has taken to protect itself against getting burned in buying such older loans.
Sea Change in Policy
The Federal Home Loan Mortgage Corp. announced recently that beginning Dec. 1, it would purchase mortgages originated more than 12 months ago only on a negotiated basis. Such mortgages can be subject to loan-by-loan review.
A more cautious approach to seasoned loans represents a sea change in the way that product is viewed, according to secondary-market executives. "In the past, seasoning was a cure-all--the loan developed a payment history, and rising housing values increased equity," said Tim Bombard of Boston Five Federal Savings Bank.
Now Freddie Mac believes "these factors are not as reliable as they once were," according to a recent bulletin sent to its sellers and servicers. It is concerned that stagnant property values and an uncertain job market may have left many borrowers unable to refinance. In other words, the mortgagee may have lost both equity and income.
Purchases of seasoned loans accounted for 2% to 3% of Freddie Mac's loan purchases so far this year, according to Michael Stamper, executive vice president at Freddie.
The new policy will mostly affect lenders such as commercial banks and thrifts that initially make or buy mortgages for their own portfolio but may decide to adjust their positions later.
Most portfolio lenders seem unconcerned at the prospect of the change. "Remember, Fannie Mae hasn't changed its policy. ... You can always find somebody to buy at the right price," said Boston Five's Mr. Bombard.
Fannie Mae, formally the Federal National Mortgage Association, will continue to buy seasoned loans on both a standard and a negotiated basis. "We don't have any evidence to say they should perform differently or that we should change our policies," said Donna Callejon, senior vice president of marketing at Fannie Mae.
She added that most seasoned loans held by banks and thrifts were not originated to the letter of Fannie and Freddie rules. As a practical matter, therefore, they can be sold only on a negotiated basis. Seasoned loans account for about 2% or 3% of Fannie Mae's loan purchases.
Sam Lyons, senior vice president of Great Western Savings Bank, Chatsworth, Calif., is not terribly concerned because "with the high level of refinancing, we're more concerned with replacing the runoff than with selling to Fannie and Freddie," he said.
Freddie Mac will use a variety of tactics to evaluate seasoned mortgages, according to Mr. Stamper. It will use its own resale data to detect mortgages that may have been issued in areas where values are declining. In other instances, Freddie Mac may also require new credit checks.