Freddie's serious delinquencies are seriously low

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Freddie Mac's serious delinquency rate dropped below 1% for the first time since 2008, lending credence to its efforts to expand credit access with low-down-payment mortgage products for consumers and representation and warranty relief for lenders.

Residential mortgages that are 90 or more days past due accounted for 0.92% of Freddie Mac's single-family book of business at the end of the first quarter of 2017, down 28 basis points from a year earlier.

The improvement comes as Freddie Mac takes more steps to promote mortgage lending to borrowers generally seen as more risky. The percentage of borrowers who made down payments of less than 20% accounted for nearly one-quarter of Freddie's loan purchases and is increasing, while the share of first-time buyers is at a 10-year high.

"Even as we expand access to credit, the credit quality of our book of business remains very strong," Freddie CEO Donald Layton said during a conference call with journalists Tuesday.

The reduction in serious delinquencies is mainly due to lower delinquencies on loans that Freddie Mac acquired before 2008, which represented 11% of the government-sponsored enterprise's single-family portfolio but accounted for 88% of its credit losses during the quarter. In that segment, serious delinquencies decreased 41 basis points, to 3.45%, year over year.

Meanwhile, the serious delinquency rate on loans originated under the Home Affordable Refinance Program held steady at 0.67% and all other loans acquired after 2008 had a rate of just 0.19%.

Freddie has also made changes to its rep and warrant policies to reduce lenders' repurchase liability, including upfront collateral rep and warrant relief on loans that undergo quality control reviews before closing using Freddie's Loan Advisor Suite.

"These enhancements will give lenders more certainty around the business they are doing with us, which ideally will translate into greater usage of our credit box," Layton said.

The policy changes and new tools have also ramped up competition between Freddie and its larger rival, Fannie Mae.

"As competition between the GSEs post-crisis has ramped up, being able to deliver rep and warrant relief sooner and more thoroughly based on fiscal sampling, based upon big data and other mechanisms is a competitive thing to make the system even more efficient," Layton said in an interview with National Mortgage News.

Freddie reported net income of $2.2 billion for the first quarter, compared with a $354 million loss a year earlier and net income of $4.85 billion in the fourth quarter of 2016. Freddie's quarterly earnings have long been subject to big swings due to an accounting mismatch with its use of derivatives. In February, Freddie implemented new accounting practices to reduce that volatility.

The company will make a $2.2 billion payment to the Treasury, bringing total quarterly dividends payments made since Freddie was placed in conservatorship to $108.2 billion, compared with draw requests of nearly $72 billion.

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