They weren’t so great the first time around, but Freddie Mac is willing to give $1 billion worth of modified loans another try. The government-controlled GSE has announced it will securitize a billion-dollar pool of mortgage loans into modified participation certificates (MPCs). The loans in these MPCs have been performing for “at least six consecutive months and were held in the company’s mortgage portfolio,” said Freddie Mac’s vice president and interim head of single family securitization, Neil Hughes. Hughes added that the disclosure of the new securitization will provide “more transparency to the investment community”[1].

When mortgages are securitized, they are combined into a large pool that can be sold in pieces to individual investors[2]. The practice is quite common, although it received a great deal of bad press in the wake of the housing crisis because investors felt that they had been misled about the level of risk they were assuming when they bought packages of subprime loans. Clearly, modified loans would seem to come with a higher risk factor than a performing mortgage in its original form since the loans have usually been more than 120 days delinquent at some time in their history. This is the first time that the GSE has securitized this type of loan; historically Freddie Mac purchased delinquent loans and then held them after modification. Freddie Mac’s vice president of distressed assets management says that the new tactic will help taxpayers and investors[3]. “Securitizing loans that have been modified and are now performing will allow Freddie Mac to better manage its mortgage-related investments portfolio…[and] create liquidity and taxpayer value,” he said.

How do you feel about these new securities? Good idea or recipe for disaster?


[1] http://www.dsnews.com/articles/freddie-mac-begins-securitization-of-modified-loans-2013-05-23

[2] http://www.investopedia.com/terms/s/securitization.asp

[3] http://www.valuewalk.com/2013/05/freddie-mac-creates-bonds-supported-by-modified-mortgages/

by Carole VanSickle