Last week both Fannie Mae and Freddie Mac announced stepped-up efforts to aid subprime borrowers who need to refinance into more affordable mortgages, as their representatives testified before Congress. Market participants expected that the effect of such initiatives on loan supply might curb HEL spread widening despite certain program criteria remaining hazy.

Freddie Mac said it plans to buy as many as $20 billion in subprime loans as part of a new initiative. Richard Syron, chief executive of the second-largest U.S. mortgage buyer, said the program, expected to begin in July, would last between two and five years. Fannie Mae, meanwhile, estimated that 1.5 million borrowers facing what it calls "payment shocks" may be eligible for loans it would buy under a new program designed to aid subprime borrowers. The dollar amount of such loans over the next several years was estimated in the "tens of billions" of dollars.

Freddie Mac has yet to release specific details about how its current loan purchase program would be modified to allow for the increased buying, although its new offerings are expected to include 40-year fixed-rate mortgages and ARMs with reduced margins and longer fixed-rate periods. To address "more immediate needs," Freddie Mac said it might modify its existing HomePossible mortgage program, which caters to high-LTV borrowers with blemished credit histories.

The GSE recently ruffled feathers among investors when it announced changes to its loan purchase criteria, particularly that it would no longer be purchasing subprime mortgages that had been approved based on a borrower's ability to pay only the initial monthly payment. The announcement preceded the release of the Office of Housing and Enterprise Oversight's most recent guidelines for nontraditional mortgages.

Fannie Mae and Freddie Mac's adherence to the guidelines could translate into wider secondary HEL spreads and, eventually, higher subprime mortgage rates, Citigroup Global Markets analysts said last week. The two GSEs buy roughly 30% of triple-A rated subprime mortgage notes.

(c) 2007 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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