Freddie to Buy Out of Pools Interest-Only Loans with Faulty Data

Freddie Mac will buy out of some securities about $29 million in unpaid principal balance of 2005-2008 interest-only adjustable-rate mortgages due to erroneous loan-level data it received.

The government-sponsored enterprise will purchase 143 mortgages in all. The move will lead to prepayments of 5% or more of some affected securitizations' unpaid principal balances. Fifty-eight participation certificates are affected.

The erroneous data on the loans' interest-only periods resulted in a situation where the loans' interest-only periods did not match the interest-only periods of the associated adjustable-rate securities.

Freddie plans to buy the loans back June 16.

The GSE from time to time has notified investors when loan concerns are about to lead to prepayments. In May 2012, for example, Freddie warned of prepayments totaling about $330 million in connection with seller-servicer repurchases.

Loan underwriting between 2005 and 2008 was particularly loose and information on loans originated during that time has proven to be erroneous more often than on loans from other eras.

Government guarantees protect GSE securitization investors from credit risk, but investors are still affected by default to the extent that liquidation of collateral triggers a prepayment.

Loans that allow borrowers to make interest-only payments for the first several years have some tax advantages for high net worth individuals. But when originated more broadly between 2005 and 2008 they showed a tendency to result in payment shock for borrowers when the time came for borrowers to pay principal.

As a result, regulators determined that the strongest so-called qualified mortgage protections from lenders' liability in determining borrowers' ability-to-repay would not extend to IO loans, among other products. ATR/QM regulation went into effect earlier this year.

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