Freddie's IO Purchases Have Doubled From 2005

Purchases of interest-only mortgages accounted for 14% of Freddie Mac's total purchase volume in the first half of this year, double the share of IO purchases in 2005.

Freddie Mac executives said IO loans still only account for 3% of the company's outstanding portfolio of owned and guaranteed loans, however. But that share of the portfolio comprised of IO, option ARM and other potentially risky loan products is likely to rise over time.

IO and Payment-option ARMs together accounted for 11% of Freddie Mac's purchases in 2005, compared to just 2% in 2004, according to the company's annual report.

While analysts have expressed concern about how these rapidly growing but potentially risky loan products will perform in a housing downturn, Freddie Mac said it has placed "a set of limits" on its purchases and holdings of risky loan types.

"We are very comfortable with what we have in those markets and we do not expect to see significant credit events," Freddie Mac chairman and CEO Richard Syron said in a conference call with investors last week.

Mr. Syron made it clear that Freddie Mac does not expect the housing market challenges to dissipate anytime soon, saying the industry faces "a relatively bumpy landing" with some places seeing steeper price corrections than others. And that could affect consumer spending and economic growth.

"In our minds, it will have a substantial negative effect on GDP," Mr. Syron said.

He said the growth of "esoteric" new loan products probably reflects a long-term shift away from traditional, fixed-rate mortgage products. An increasingly mobile workforce is one reason the popularity of fixed-rate loans may be waning.

But he also said recent concern and scrutiny of IO and payment-option products, as well as current economic conditions, may drive a resurgence in popularity for traditional, fixed-rate products. He noted that these loans are the "sweet spot" of Freddie Mac's business.

A spokesperson for Fannie Mae said it does not break out IO loans as a share of total purchases and would not be able to provide comparable figures to those released by Freddie Mac. (c) 2006 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com

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