National City identifies refi scheme
By MortgageDaily.com staff
4/14/2005

A California mortgage broker's agreements with borrowers to quickly refinance has caught the attention of Freddie Mac -- which has issued a statement indicating these type of arrangements are not permitted.

National City Mortgage notified Freddie that the broker had made agreements with borrowers to close on an initially higher rate loan, then quickly refinance for a lower rate, according to an announcement Wednesday from Freddie.

It appears from the announcement that the broker attempted to earn a yield spread premium, then quickly lower the borrowers rate through a second refinance transaction.

National City called the practice "unacceptable," and immediately brought them to the secondary lender's attention, Freddie, based in McLean, Va., said.

There are often no repercussions to a mortgage broker for early prepayments. But Freddie -- which manages a $1.5 trillion portfolio -- must match its borrowings to its lending by making complex securities transactions. In February, the government sponsored enterprise said the balance of its cash flows from assets and liabilities, known as the average duration gap, remained at zero months in February.

There were 48 residential mortgage-backed securities pools affected, according to the announcement -- posted at www.FreddieMac.com.

"Prearranged refinancing arrangements are not permitted on mortgages sold to Freddie Mac," said company executive Dave Stevens in the announcement. "Working with our sellers and servicers, Freddie Mac will continue to take all appropriate steps to stop these practices."

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