Wednesday, April 18, 2007

Subprime Buyer of Last Resort?

This is interesting. From Bloomberg:
April 18 (Bloomberg) -- Freddie Mac, the second-largest source of money for U.S. home loans, is offering to buy as much as $20 billion of mortgages in an effort to maintain the financing available for subprime borrowers, Chief Executive Officer Richard Syron said today.

"To the maximum extent possible we want to approach this from a market driven kind of approach," Syron told reporters in Washington during a housing market summit in Washington led by Senate Banking Committee Chairman Christopher Dodd.

Subprime mortgage bond sales have slowed this year after late payments on the underlying loans reached a four-year high of 13.3 percent in the fourth quarter, according to the Mortgage Bankers Association. The sale of subprime mortgage bonds had grown to $450 billion last year from $95 billion in 2001, the Securities Industry Financial Markets Association says.

Syron's offer would effectively guarantee that there is demand from Freddie Mac for as much as $20 billion in new mortgage bonds so long as lenders refinance some of the loans outstanding into more favorable terms for subprime borrowers.
This seems a little bit like Freddie Mac wants to ensure a price floor for subprime mortgage bonds, which would be an interesting development.

Important questions remain, though. Will $20 billion in purchases be enough to prevent the prices of those bonds from falling significantly? What is Freddie's motivation for this offer? Are they hoping to stem greater losses in the subprime market by effectively doubling-up on their existing subprime bets? How heavily can they engage in such price-supporting actions, if $20bn turns out not to be enough?

I'm curious to learn more about this...

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