Pipeline

Out of the Pool

Freddie Mac roiled the mortgage-backed bond market Wednesday with a plan to repurchase $60 billion of severely delinquent loans from its securitized pools.

The repurchases will cover all securitized Freddie loans that are 120 days or more past due. It was bad news for investors who had bought Freddie paper for more than face value. But in the long term, the move could improve the prices that Freddie gets for new issues. It could even reverse the longstanding relationship in which Freddie bonds fetched slightly lower prices than Fannie Mae's.

Fannie followed by saying it would step up repurchases of delinquent loans, although unlike Freddie, Fannie is staggering its buybacks and did not quantify them.

The market had been expecting the government-sponsored enterprises to undertake such repurchases this year — but it had not counted on one of them doing so in one fell swoop.

"This is a very big deal," said Walt Schmidt, senior vice president and manager of structured product strategies at FTN Financial Capital Markets in Chicago. "It's disruptive to the market."

Freddie's 6.5%-coupon, 30-year mortgage bonds slid on the news. By late afternoon they were trading at 107.14 cents on the dollar, down from 108.08 cents Tuesday, according to Bloomberg data. The bonds lost value because investors will get a good chunk of their principal back sooner than expected as a result of the buyouts.

"The prepayment rate for February is going to be really high for Freddie Mac securities," said Derek Chen, an analyst at Barclays Capital. "So that will hurt Freddie Mac securities for now." But "after this month, it could improve, because the loss is already realized and that pipeline is cleared," he said.

Indeed, forward contracts for Freddie bonds that will settle in March improved in price relative to equivalent Fannie issues.

"It looks like the market anticipates that [Freddie] is going to be a better looking asset than Fannie starting with the March settlement," Schmidt said.

Nothing to Lose …

The buyback plans stem from an accounting rule change that the GSEs adopted at the beginning of January. Previously they would have had to write down the mortgages brought on to the books to steeply discounted market prices, resulting in serious hits to capital.

But under the new rule, Fannie and Freddie had to bring the securitized loans onto their books anyway, and they do not have to mark them to market. Hence it will be less costly for the GSEs to hold loans that are 120 days or more delinquent in their portfolio than it would be to continue advancing the unpaid interest on the loans to investors.

Mark Hanson, Freddie's vice president of mortgage funding, said it decided to buy back all the loans at once to "minimize market disruption."

"We wanted to reduce the growing uncertainty around whether we'd buy them back or when," Hanson said. "We feel that question has been answered now and the market has returned to more orderly pricing."

Fannie said it would repurchase a "significant portion" of the $127 billion of 120-days-late loans in its securitized trusts over several months. The GSE did not return calls by press time.

Since its pipeline of delinquent loans is much larger than Freddie's, Fannie probably did not have the option of buying them all back at once, Schmidt said.

Ditech's Not Dead

GMAC Inc. may be cutting more staff and closing additional offices, but it's not ditching Ditech.

The auto finance company said Monday that it is "committed to the Ditech brand, and its lending activities and service to its customers continue uninterrupted."

Confusion over the online mortgage lender's future surfaced last week after GMAC said it planned to shutter three offices and cut more than 550 jobs. A bulk of the cuts were to be at a Costa Mesa, Calif., office that houses Ditech.

A subsequent article in the New York Post further stoked concerns, citing an unnamed employee as saying Ditech hadn't advertised in nearly two months.

Even in that article, GMAC said it was committed to the Ditech brand. But the message was still a bit unclear, at least to those on Tree.com Inc.'s earnings conference call Friday.

"We've actually heard they've essentially closed up shop," Doug Lebda, Tree.com's chairman and chief executive, said during the call after an analyst said he'd heard Ditech had cut back on its advertising. Tree.com owns Lending Tree LLC, the online mortgage lead generator and lender.

"You never like to see competitors get out of the market, because it certainly signals that the market is pretty tough," Lebda went on. "But at the same time, fewer competitors going after the same market, it probably does help in some way."

GMAC said the Ditech operation had not been "performing up to expectation in its previous configuration," so the company decided to move the business to a Fort Washington, Pa., office.

GMAC has been considering a number of alternatives for Residential Capital LLC, the umbrella unit for the company's mortgage businesses, of which Ditech is a part. ResCap has been a considerable drag on GMAC and a major reason it needed multiple U.S. bailouts.