Freddie Mac finds some mortgages unacceptable


Freddie Mac, the nation's second-largest buyer of mortgages, unknowingly bought a small number of mortgages that had "unacceptable refinance" terms and then sold them in securities offerings to investors.

The company said last week that an investigation had discovered that a California broker sold borrowers mortgages with above-market interest rates and then provided financial incentives to encourage quick refinancing.

The broker, who was not identified, profited from the fees from the quick turnover.

Freddie Mac said that the unacceptable loans were found in 48 pools of mortgage-backed securities that it detected as having higher-than-normal prepayment rates. In turn, the company asked National City Mortgage - a division of the National City Corp., a bank based in Cleveland - which had sold it the unacceptable loans, to conduct an investigation. That inquiry found the broker whose practices are now in question.

"The borrowers were not victims here," said Sharon McHale, a spokeswoman for Freddie Mac. "They were cognizant of what was going on and, in some cases, it was the same borrowers refinancing. They were doing this multiple times. That's how it worked."

It is unclear if the matter will be turned over to local, state or federal law enforcement authorities. Freddie Mac has alerted the Department of Housing and Urban Development, as well as the Office of Federal Housing Enterprise Oversight, its regulator.

"We are aware of this issue and it is under investigation," said Corinne Russell, a spokeswoman for the regulator. A HUD spokesman confirmed that the agency was aware of the situation but said it was leaving the matter in the hands of the company and its regulator.

"Prearranged financing arrangements are not permitted on mortgages sold to Freddie Mac," Dave Stevens, Freddie Mac's senior vice president of mortgage sourcing, said in a statement.

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