Freddie Limits B&C Exposure

Freddie Mac here revealed that nearly one-fifth of its retained portfolio consists of securities backed by subprime mortgages, but since those securities are credit enhanced to a AAA rating, the company believes its credit exposure is limited.

Freddie Mac disclosed that it held $124 billion of securities backed by subprime home loans at the end of last year, though virtually all were AAA-rated tranches from mortgage securities deals. That comprised about 18% of Freddie Mac's $704 billion retained portfolio.

In total, non-agency MBS accounted for $238 billion of the retained portfolio, consisting of both prime and subprime credits, and 96% of the non-agency mortgage securities were rated AAA, Freddie Mac said. Even though credit costs rose last year, Freddie Mac said that by most measures, its credit risk exposure remains low. The company's entire book of guaranteed loans and loans in portfolio had a loan-to-value ratio of 57% at the end of 2006, and 82% of the company's guarantee portfolio consisted of fixed-rate loans.

Only 14% of its loans have credit scores below 660. And only 4% of its loans have loan-to-value ratios above 90%, the company said. Nonetheless, Freddie Mac once again advised that its credit losses on its entire guaranteed portfolio are rising from their historic lows of recent years. In 2007, credit losses remained below two basis points of the portfolio, company executives said in a conference call with investors and analysts. In a table released with its earnings, Freddie Mac said that the annualized rate of loss on its total mortgage portfolio last year was 1.4 basis points, up from 1.1 basis points in 2005.

In the conference, Freddie's CEO, Richard Syron, said that Freddie Mac has used its strong capital position to support growth in its single-family loan guarantee business.

He said that last year's housing market was characterized by low single-digit appreciation for the full year with a "steep fall" at the end of the year.

Going forward, he said Freddie Mac expects to use its capital position to broaden the array of single-family loans products it can support and help in the development of loan products that can help subprime borrowers refinance out of troubled ARM loans that are resetting to higher rates.

He said Freddie Mac's retained portfolio shrunk somewhat last year because market conditions did not present favorable buying opportunities, but several Freddie Mac executives suggested conditions are changing. As credit spreads widen and risk premiums increase, Freddie Mac may find it more attractive to add mortgage assets to its portfolio.

Mr. Syron said the portfolio allows Freddie Mac to step in when other buyers are wary of the mortgage market, saying the portfolio can play an important role in helping Freddie Mac meet its housing needs. Freddie Mac executives said their portfolio of retained and guaranteed loans remains low risk. Gene McQuade, president and chief operating officer of Freddie Mac, said the upward trend in credit costs should be seen in historical perspective.

"If you look at what's happened at least with the GSE portfolios over the last four or five years, the credit experience has been extraordinary."

Freddie Mac's new CFO, Buddy Piszel, said that interest rate risk measures have remained stable with regard to the company's retained mortgage portfolio. He noted that even as Freddie Mac's average guarantee rate declined slightly last year, guarantee-fee income was up from $1.5 billion in 2005 to $1.7 billion last year due to guarantee business growth.

He said Freddie Mac saw "modest underling deterioration" in credit conditions. However, he said credit costs are "still very low by historical standards."

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