Freddie Mac is selling three pools of deeply delinquent loans with the combined unpaid principal balance of $410 million.  According to Freddie Mac’s spokesman, the loans involved in the sale include “a large share that are more than two years delinquent,” which is consistent with Freddie Mac’s “continued goal of reducing illiquid assets from its investment portfolio.” Industry commentators expect record prices from this auction as Wall Street firms have demonstrated considerable appetite for delinquent loans and have sent prices for such loans surging.

This is Freddie Mac’s second sale of the soured debt after its first sale in August 2014 of $659 million of bad loans was received extremely well in the market.  The August 2014 transaction drew 22 bidders and culminated in a Wall Street investment firm purchasing the loans in a private transaction at a reported price of 77 cents on the dollar. This compares with average nonperforming loan prices of 64.5 cents at the end of 2013 and 49 cents in the beginning of 2013.

Freddie Mac was one of the last entrants into the market after about $30 billion of bad loans were sold in the first half of 2014 by HUD, as well as numerous banks looking to improve their loan portfolios.  Players on both sides of these transactions have good reasons to get involved.  Sellers of delinquent loans seek to avoid the added costs of holding delinquent debt and, in Freddie Mac’s case, there is an additional reason to sell bad debt because the Federal Housing Financing Agency requires a reduction in the number of severely delinquent mortgages on Freddie Mac’s books.  Wall Street buyers, such as hedge funds and private-equity firms, are driving the big trade frenzy for bad loans in the hopes of profiting from the housing recovery as rising home values across the United States have restored equity to many properties owned by delinquent borrowers.

We will continue monitoring this trend and whether changes in loan ownership will be accompanied by transfers of servicing rights to these delinquent loans.