Freddie Mac's Woes Haven't Hurt Refinance Wave

NEW YORK – Mortgage rates dropped to new lows this week and lenders say it's business as usual, a clear sign the upheaval at Freddie Mac, the No. 2 U.S. home finance company, has not hurt the red-hot U.S. mortgage industry.

Housing has been the only consistently strong sector in the U.S. economy over the last two years, and the prospect of a company as important to housing as Freddie Mac (search) having serious problems is, in theory at least, worthy of concern.

The company's stock was down by as much as 20 percent this week after Freddie Mac, frustrated with the slow progress of an internal audit, dismissed its top manager, David Glenn, saying he was being less than cooperative in the accounting probe.

The stock sell-off reflected jitters on Wall Street in the wake of several high-profile accounting debacles at companies such as Enron, WorldCom and Tyco in the last 18 months.

While it's still possible that some surprise may be buried in the doctored diary that got Glenn fired, mortgage industry sources saying nothing has changed in their interaction with the housing giant is a very good sign indeed.

"The bottom line is there has been no effect. The marketplace has not had any effect," said John Svirsky, a broker based in Garrison, New York.

Few people away from Wall Street even know what Freddie Mac is, let alone how important it is to the easy access to home finance Americans enjoy these days.

Freddie Mac and its even larger counterpart, Fannie Mae (search), are publicly traded corporations chartered by Congress to insure home loans against default and buy them, allowing the loans to be packaged together and sold to investors on Wall Street as bonds known as mortgage-backed securities.

Mortgage lenders take profits they make when loans are packaged and sold, or "securitized," and loan that money again in an efficient cycle that has created a huge mortgage-backed securities market over the last 20 years.

Roughly 70 percent of the financing of single-family homes in the United States is generated by Freddie Mac and Fannie Mae.

"As long as the flow of funds is unimpeded into the real estate markets, the average American is not going to be concerned about it," Steven LaDue, head of Affiliated Mortgage in Wauwatosa, Wisconsin, said of the Freddie Mac news.

With mortgage rates down to new lows this week and Americans rushing to refinance home loans to cut borrowing costs, stability at Freddie Mac and Fannie Mae are critical.

While corporations have slashed spending and jobs, the U.S. economy has been buttressed by steady demand for housing and by borrowing rates that have fallen with the Federal Reserve's rate-cutting campaign that began in January 2001.

As rates have ratcheted lower and lower over the last few years, homeowners have been able to refinance more than once, paying off debt and spending money on goods and services.

Falling borrowing costs, now at levels not seen since the Eisenhower presidency, have unlocked enough consumer spending to fuel 20 percent of U.S. economic growth since the economy began to swoon, according to economists.

According to a survey of lenders conducted by Freddie Mac released on Thursday, rates on a 30-year fixed-rate mortgage, the loan favored by most Americans, fell to an average of 5.21 percent, the lowest on Freddie Mac records dating to 1971.

The most recent decline, spawned by anticipation the Fed may cut rates again later this month, is spawning another wave of refinancings and making mortgage brokers work long hours.

"Everyone's working these hours," said LaDue. "For many mortgage companies it is the best of times and the worst of times. Right when we get caught up, rates drop again."