Freddie Mac said Monday morning that it will change its operating policy to allow for mortgages beyond 120 days delinquent to remain in pools underlying Mortgage Participation Certificates, under certain conditions. The GSE said it will purchase loans out of such pools only in certain circumstances, including when a modification has taken place, a foreclosure sale occurs, or delinquency has extended beyond 24 contiguous months. Freddie also said it would purchase delinquent loans whenever the cost of its guarantee payment to investors would be greater than the cost of holding the loans on its own books. Freddie previously had purchased all delinquent loans out of a pool shortly after the 120th day of delinquency, but said in that the policy did “not reflect the pattern of recovery for most delinquent loans.” From the press statement:

Allowing the loans to remain in PC pools will provide a presentation of its financial results that better reflects Freddie Mac’s expectations for future credit losses. Taking this action will also have the effect of reducing the company’s capital costs. The expected reduction in capital costs will be partially offset by, but is expected to outweigh, greater expenses associated with delinquent loans.

Freddie’s plan to reduce capital costs comes on the heels of a plan by Fannie Mae to institute an ‘adverse market delivery charge’ of 25 basis points on all loans sold to the GSE beginning March 2008. For more information, visit http://www.freddiemac.com.