In November, Freddie Mac kicked off its new plan to purchase most of its 120-days-or-more-delinquent mortgage loans from the company's related fixed-rate and ARM Mortgage Participation Certificate (PC) securities.

The GSE will begin securitizing pools with these as collateral as Prefix "R." These deals will be backed by loans that were once delinquent, repurchased and reinstated to current status without a modification.

The reinstated loans will have been current for at least four consecutive months before being securitized. For its initial offering, the agency securitized loans that had been current for 12 consecutive months.

Freddie Mac has purchased a significant number of delinquent mortgage loans from PC pools and held those loans in its mortgage-related investment portfolio.

Most delinquent loans that were repurchased have been through modifications, Nomura Securities analysts said in a report.

However, only loans that were offered a repayment plan or a forbearance plan or just became performing without any aid are eligible to be re-pooled in the new securitization program.

A repayment plan spreads the payment arrears over a specified period of time and is added on to the borrowers' monthly payment.

A forbearance plan offers relief to borrowers by allowing them to make partial or no payments for a defined period of time followed by a repayment plan to make up the arrears.

Both of these plans generally work best when the borrower experiences a temporary financial setback, like loss of employment, and is able to resume making the payments in a short period of time.

These workout options can be used and the loan would be reinstated to current status without repurchasing the loan from the pool.

Currently, JPMorgan Securities analysts estimated that Freddie Mac has around $14 billion, or 75,000, of qualifying loans that meet these guidelines.

"Most of the loans that Freddie will be issuing would be those that completed repayment plans after the GSEs began automatically repurchasing loans, after the first quarter of 2010," Nomura analysts noted.

They projected that the maximum issuance based on the completed repayment and forbearance plans reported to date would be around $6 billion.

Considering the current run rate of the completed repayment and forbearance plans, analysts expect that the maximum monthly issuance can be approximately $200 million.

Fannie Mae has not yet announced a matching program, but it holds an estimated $17 billion, or 95,000, of similarly qualified loans in portfolio, according to JPMorgan analysts.

"These numbers provide an upper bound on potential securitization, but we don't expect to see nearly that much issuance in the near future," they said.



However, the new pools are expected to be backed by loans that are of better quality than re-performing loans seen in Ginnie Mae transactions, according to Nomura analysts.

In Federal Housing Administration (FHA) loans, borrowers can be reinstated to current status without modification by using a forbearance plan and/or a partial claim, and lenders are often encouraged to combine forbearance with partial claim.

A partial claim is an interest-free loan given to the borrower to make up the arrears and render the borrower current, Nomura analysts explained. The loan can be re-pooled immediately after it is reinstated.

It is possible that a partial claim was often used along with a forbearance plan to reinstate the current status on a loan immediately after a forbearance period, as opposed to allowing the borrower to repay the arrears like the GSEs.

"A borrower repaying the arrears and reinstating the current status is a significant statement of commitment to their mortgage liability," Nomura analysts explained.

As a result, it is likely that the Freddie Mac re-performing loans will perform better than loans going through similar FHA loan workouts.

However, JPMorgan analysts said that the lack of information on the loans going into the new Freddie Mac deals makes coming up with default expectations difficult.

Modified loans typically have re-default rates of 40%, but since the loans in the Freddie pool haven't actually been modified, applying this assumption would be inaccurate. Also, the selection of loans that have been current for at least 12 months reduces the probability of re-default.

"Prepayments should be relatively muted, as borrowers who have gone into serious delinquency should have dented credit scores," JPMorgan analysts said.

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