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Freddie Mac to Tighten Up New Refinance Programs

Homeowners seeking to refinance Freddie Mac mortgages may have fewer options under President Obama’s foreclosure prevention plan. According to Freddie Mac spokesman Brad German, borrowers with Freddie-backed loans can only refinance through their current, which keeps them from shopping around for the lowest rates.

Freddie Mac ended the fourth quarter with a loss of $23.9 billion and has already requested an injection of capital from the Treasury worth $30.8 billion. This brings the company’s total loss for 2008 to over $50 billion, compared to only $3.1 billion the previous year. This means that in the past two years, it has lost more than its total earnings since 1971, which sum up to $42 billion.

The company blames the losses on the puts much of the blame on the spate of mortgage defaults and the resulting decline in the derivative values that hedged against risks in interest rates. Another leading mortgager, Fannie Mae, reported a smaller but still significant loss of about $25.2 billion for the last quarter.

The U.S. Treasury has pledged up to $200 billion each for both companies. Both have agreed to offer senior preferred stock in exchange for the capital assistance. Freddie Mac has already received $13.8 billion in assistance last year, while Fannie Mae has requested $15.3 billion.

The management of both companies was seized by the Federal Housing Finance Agency in September last year, as reports showed that their capital was too thin to shore up the losses. Fannie and Freddie are now run by federal officials, and operations are being geared towards foreclosure prevention despite the delays in regaining profit.

With this new capital injection, the government’s preferred stock in Freddie Mac will reach an expensive $45.6 billion. This means that the company will be paying $4.6 billion in dividends every year, as per the 10% scheme offered by the government. It would only be the third time since 1971 that the company’s profit went over that amount.

The new refinancing program will impose a maximum fee on refinances totaling 0.25% of the loan balance. Fannie Mae borrowers, while still able to shop around, will be assessed based on credit risk. High-risk borrowers can get fees totaling 3%.

 

Earlier in Mortgage Servicers & Lender News:
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