As the government-sponsored enterprises seek to expand their lines of business by traveling down the credit curve into subprime territory, Freddie Mac is now working on a new mortgage program that will allow borrowers to reduce their interest rates over the course of the loan.

The program "will increase liquidity for mortgages that allow borrowers to move to a lower rate after 24 consecutive months of good payment history without having to refinance," said Freddie Mac's chief credit officer David Andrukonis, at a conference on predatory lending in Atlanta last week. It is intended to help borrowers with an impaired credit history.

According to Douglas Robinson, a Freddie Mac spokesman, "It's something we've heard from our customers that they would like, and that's why we're going to be doing it."

Freddie Mac's step-down program is said to be similar in structure to a program called "Timely Payment Rewards" that Fannie Mae introduced last fall to begin a foray into the subprime sector. With this program, a borrower is eligible for a one-percentage point reduction in the mortgage rate after 24 consecutive months of on-time payments.

However, Robinson said that the program is still in its preliminary stages, "so the details of it in whether it's going to be all securitized or all portfolioed," has not been finalized. But he did say Freddie Mac would finance the program in some way. He anticipates the final workings of the program to be released "soon."

Mortgage-backed securities traders, while acknowledging there is some demand for this type of product in the market, are surprised that Freddie Mac is pursuing a step-down program. "Certainly there's a market for it, but I don't believe it's deliverable into TBA pools," said one trader.

"That's one of the big things in the market now is with the creation of these diverse products that's another factor in combination with this lower issuance. The TBA market is being starved of product, slowly strangled," he added, noting that these products are being held as whole loan or being bought as proprietary by the agencies.

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