Permitted "Piggybacks" Fed Freddie's Portfolio Risk

The Washington Post reported last Friday:

• For a glimpse of the risks that infected the mortgage business in recent years, consider a small slice of what happened at Freddie Mac, the giant home-loan investor chartered by the government to bring stability to the housing market. Before the era of easy credit, home buyers were ordinarily required to come up with down payments, which gave them an equity stake in their property. That equity reduces the danger of foreclosure, and federal law prohibits Freddie Mac from buying mortgages that cover more than 80 percent of a home's value -- unless the loan comes with a safety net, such as an insurance policy that would kick in if the borrower defaults. However, in recent years, Freddie Mac permitted home buyers to borrow all or part of the remaining 20 percent by using second loans, called "piggyback" loans, with no safety net.

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• The purchase of piggyback loans is one of many factors that has left Freddie Mac exposed to potentially larger losses as a nationwide debt bubble deflates. The McLean company turns out to have been more vulnerable to a downturn in housing prices than it appeared.

For more, see 'Piggyback' Loans Allowed by Freddie Fed Mortgage Risks (multiple pages); go here for the one-page "Print" version).