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Troubled loans are changing hands

Date posted:  5/21/14 07:30:00 AM Freddie Mac is selling a portion of its non-performing loans.

In a first for mortgage behemoth Freddie Mac, the firm has agreed to sell a slice of its most troubled loans to an unnamed investor.

It's big news for troubled homeowners, as the investor can choose to reduce the size of the borrower's mortgage, which would not have been possible if the loans stayed with Freddie Mac, according to The Washington Post.

"It was certainly well received in the market, and we're going to be looking for opportunities to reduce exposure in our investment portfolio," Thomas Fitzgerald, a Freddie Mac spokesman, told The Wall Street Journal.

It's been a long time coming for industry analysts, who have been on the lookout for non-performing mortgages from Freddie Mac and Fannie Mae. But the first-of-its-kind sale changes that, and Freddie Mac stated 22 investors bid during the distressed mortgage auction, with the strong interest indicating there could be additional sales down the road. The deal is expected to close by the end of the month. The sale was worth $659 million for the unpaid principal balance of the loans.

Why is Freddie Mac selling?
According to Laurie Goodman, director of the Urban Institute's Housing Finance Policy Center, the deal could be a boon for struggling homeowners.

"My assumption is that they're selling the loans because investors have a broader tool kit than they do," Goodman said. "Clearly Fannie and Freddie can't do principal reductions, so it's a way around that."

In the first quarter of 2014, 6.3 million homes throughout the nation had a mortgage with negative equity, according to CoreLogic. During that same time, more than 10 million mortgaged homes were undervalued, but not underwater.

An underwater home is when a person owes more on the mortgage than their home is worth, which can cause major problems if the homeowner were to run into any serious financial obstacles, as they wouldn't be able to sell their home for enough to pay off the mortgage and make cash. It's also not easy for underwater homeowners to refinance.

Prior history of the lending giants
The Journal reported the U.S. Department of Housing and Urban Development increased the sales of thousands of nonperforming loans guaranteed by the Federal Housing Administration over the last two years. The prices of those loan sales gradually increased during that span.

But Freddie Mac and Fannie Mae mostly refrained from any delinquent loan sales. The Journal added that instead of cutting loan balances for borrowers who were behind on payments, Freddie and Fannie would elect to reduce interest rates, which in turn trimmed monthly mortgage payments. The lending giants would also offer forbearance, a deed that doesn't require payments on a portion of the loan.

Learning about the options
According to Mark Zandi, chief economist at Moody's Analytics, the sale of delinquent loans by Freddie Mac could help some of the struggling homeowners, but Zandi stated that mortgage debt forgiveness should be one of the last options on a homeowner's mind.

"You want the tool in your tool kit, but it's a tool you pull out at the end, after you've tried everything else, because it's very costly and you risk creating a moral hazard problem," Zandi told the Post. "You would only want to do this in a very careful and judicious way."

Zillow, a real estate company, advises underwater homeowners to shop around. The company stated there can be vast differences in policy from one lender to the next, meaning that one company might turn a homeowner down while the other offers a refinancing package.