Freddie downplays mortgage bond refinancing impact

By Al Yoon

CHICAGO (Reuters) - A Freddie Mac executive on Monday downplayed speculation the company's bonds would see more refinancings, and lose value, relative to Fannie Mae's after breaking with its rival by eliminating some fees.

The stakes are high for Freddie Mac (FRE.P), which for years has tried increased disclosures and other programs to make its bonds more attractive than Fannie Mae's. Fannie Mae mortgage bonds command a premium to Freddie Mac's since the volume of their issuance is far greater, enhancing the liquidity so valued in today's turbulent environment.

At the heart of the controversy in the $5 trillion market are bond prepayments, where principal is returned to investors when loans are refinanced. Fast prepayments when interest rates are low hurts bonds that are valued above face -- which is most of them today -- since principal is returned to the investors at 100 cents on the dollar.

The outlook for Freddie Mac bonds relative to Fannie Mae's improved as mortgage rates continued to decline, providing borrowers enough savings to equally boost refinancings for loans funded by either of the housing finance giants, said Don Bisenius, a senior vice president for Freddie Mac's single family credit guaranty business. Homeowners can reduce payments by refinancing, just how much is in question, he said.

"I think rates have fallen far enough that we are not as concerned as we were before" about faster prepayments and a harmful impact on Freddie Mac bonds, Bisenius told Reuters at a Mortgage Bankers Association meeting in Chicago.

Average 30-year fixed mortgage rates fell as low as 4.61 percent in late March, from around 5 percent when Freddie Mac announced its move, according to Mortgage Bankers Association data. The rate was 4.7 percent in the week ending April 10.

Freddie Mac cut fees to lenders, compensating for the risk of bigger loans relative to property value and lower credit scores, early last month to grease President Barack Obama's plan to make refinancings more available for borrowers whose homes have lost value in the housing downturn.

But Fannie Mae (FNM.P), the larger of the two government-controlled companies, surprised investors and lenders by keeping its fees, or loan level pricing adjustments. Some traders began to bet refinancings on loans in Freddie Mac bonds would quicken.