Freddie's Appetite Grows For Adjustable Loan Products

Freddie Mac is finding attractive pricing on adjustable-rate mortgages, including subprime interest-only loans, according to the company's top investment officer Patricia Cook.

"Agency and AAA-rated non-agency ARM products currently represent an increasing percentage of our total purchases" for the retained mortgage portfolio. "These products provide attractive risk-adjusted returns," the executive vice president for investments said.

Returns on fixed-rate products are not as attractive because of investor demand, she explained.

Ms. Cook made her remarks in response to questions during a recent teleconference in which top Freddie executives briefed analysts and investors on the company's business outlook.

On the investment side "we permit IO mortgages to be included as collateral backing non-agency AAA securities in which we invest," she said.

In the case of subprime asset-backed securities, Freddie makes sure the loans comply with its anti-predatory lending guidelines, which limit prepayment penalties to three years and ban mandatory arbitration clauses. The company also requires higher levels of subordination, a company spokesman said.

Meanwhile, growth of the retained mortgage portfolio slowed to a 3.1% annual rate in September. Freddie executives estimate the growth rate for the year will be in the low- to middle-single digits.

In July, Freddie rolled out a whole menu of IO ARM products that it is willing to purchase from lenders and securitize. These are prime products, not subprime.

However, Freddie chairman and chief executive Richard Syron is talking about expanding the company risk profile as a way to meet the new affordable housing goals that the Department of Housing and Urban Development issued last week.

"Over time, Freddie has been very, very successful in dealing with interest rate risk," Mr. Syron said during the teleconference. "One thing we are actively looking at is how we can use existing or potentially new credit derivatives" as a way of handling loans with different risk profiles.

One option is to sell the expected loss on a pool of loans to an investor, a Freddie spokesman said. Freddie has not tried such a structure, but it would move the credit risk off the company's books, he explained.

Separately, Freddie Mac recently elected 13 members to the company's board of directors, ratified the selection of PricewaterhouseCoopers as the company's auditor and approved a stock compensation plan at its annual meeting last week.

The reappointment of PwC as Freddie Mac's independent auditor for 2004 was ratified by 99% of the votes cast, Freddie Mac said.

Chairman and CEO Richard Syron reiterated Freddie Mac's commitment to be "focused on and responsive to our customers."

The board of directors that were elected are Barbara T. Alexander, independent consultant; Geoffrey Boisi, retired vice chairman and co-CEO of J.P. Morgan Chase and Co.; Michelle Engler, trustee of the JNL Investor Series Trust; Richard Karl Goeltz, retired vice chairman and chief financial officer of American Express; Thomas Johnson, retired chairman and CEO of GreenPoint Financial; William Lewis Jr., managing director at Lazard Freres Co.; John B. McCoy, retired chairman and CEO of Bank One Corp.; Eugene McQuade, president and COO of Freddie Mac; Shaun O'Malley, chairman emeritus of Price Waterhouse LLP; Ronald Poe, president of Ronald F. Poe & Associates; Stephen A. Ross, Franco Modigliani professor of finance and economics at the Massachusetts Institute of Technology; Richard Syron, chairman of Freddie Mac; and William Turner, manager of Signature Capital.

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