A limited number of mortgages have been originated using unacceptable refinance practices that increase the likelihood that these mortgages will prepay more quickly than comparable mortgages originated without such practices, according Freddie Mac.
Based on the group’s ongoing investigation, it appears that a mortgage broker entered into arrangements with borrowers in California that provided financial incentives designed to result in quick refinancings of mortgages. The mortgages were originated at above market interest rates for such borrowers. Following discussions between Freddie Mac and National City Mortgage, a customer of Freddie Mac, concerning mortgage prepayment behavior, National City discovered these unacceptable refinance practices and brought them to the attention of Freddie Mac.
Prior to the detection of such refinance practices, however, certain mortgages originated under such refinance practices were sold to Freddie Mac. Certain Freddie Mac Mortgage Participation Certificates (PCs) are backed by varying percentages of mortgages that may have been originated under such refinance arrangements. As a result, such PCs may experience prepayment rates that are faster than other Freddie Mac PCs issued during the same time period with the same coupons and terms. Attached Schedule A identifies, by pool and CUSIP number, the Freddie Mac PCs for which five percent or more of the current unpaid principal balance is represented by mortgages that may have been originated under such refinance arrangements.
Dave Stevens, Freddie Mac’s senior vice president, Mortgage Sourcing, said, “We appreciate our valued customer National City working with us on this matter. Prearranged refinancing arrangements are not permitted on mortgages sold to Freddie Mac. Working with our sellers and servicers, Freddie Mac will continue to take all appropriate steps to stop these practices.”