Freddie Ponders Subprime Expansion

The McLean, Va.-based company’s Executive Vice President of Investments and Capital Markets Patti Cook shared with investors at a recent Credit Suisse Financial conference the successful stride Freddie has continued to achieve over the recent years and how it might be a good time to expand their market share into the subprime arena.

Cook said the “mantra” at Freddie is to “touch more loans” in the coming year. To do this, she said Freddie would need to “expand internal securitization capabilities” and increase the opportunities to acquire nontraditional GSE loan products to be able to “buy a greater breadth (of mortgages) from our customers.”

“The idea of touching more loans is to increase our penetration of the overall conventional conforming market,” Cook explained.

Historically, Cook said, Freddie has maintained a platform that to some would be considered “very restrictive” and “narrow.” In order to touch more loans, she said, the GSE would need to broaden their customer base by increasing the value propositions they offer.

“We look at our charter or our mission,” Cook told investors, “and there is nothing that says that we should be only, for example, a fixed rate high credit quality mortgage guarantor.”

Cook asked, theoretically, why Freddie couldn’t be in a position “of having a bid for every conventional conforming mortgage that is being originated, whether it is fixed or floating and whether it is high credit quality or subprime.”

Regarding Freddie’s ability to handle the credit risk, Cook explained, “the key is to be able to buy the mortgages and decide how much of that credit risk we want to retain and how much we want to sell.”

Cook said the current default rate of Freddie’s $1.3 trillion portfolio is less than one percent and has an average LTV in the mid 50s.

A company spokesman said although it is an aspiration for Freddie to be able to work with their lending partners and be able to purchase more types of loans, the GSE has not yet set any parameters or timetables.