April 18 (Bloomberg) -- Freddie Mac, the second-largest source of money for U.S. home loans, plans to buy as much as $20 billion in subprime mortgages to help borrowers with poor credit histories avoid default and the loss of their homes.

``To the maximum extent possible we want to approach this from a market driven kind of approach,'' Chief Executive Officer Richard Syron told reporters today at a housing market summit in Washington led by Senator Christopher Dodd.

Subprime mortgage bond sales have slowed this year after late payments on the underlying loans reached a four-year high of 13.3 percent in the fourth quarter, according to the Mortgage Bankers Association. The sale of subprime mortgage bonds had grown to $450 billion last year from $95 billion in 2001, the Securities Industry Financial Markets Association says.

Syron's program, scheduled to begin in July, would create demand from Freddie Mac for as much as $20 billion in subprime home loans, including refinancings with more favorable terms than existing mortgages. Freddie Mac plans to pursue the program for two to five years, Syron said in an interview.

The company has yet to gain the approval from its regulator for both the amount of capital needed and the new financing mechanisms proposed, he said.

``We have not sat down and talked this through in any substantive detail'' with the Office of Federal Housing Enterprise Oversight, Syron said. ``This is right in what our mission is.''

Shares of Freddie Mac rose $2.21, or 3.5 percent, to $64.78 as of 2:18 p.m. in New York Stock Exchange composite trading.

Company Mission

McLean, Virginia-based Freddie Mac was created by Congress to increase the financing available to homebuyers. The company fulfills this mission through a process of channeling money into the mortgage market by buying loans from lenders. It profits by holding mortgages and mortgage bonds as investments and by charging a fee to package home loans as securities for resale.

Ofheo, in response to $5 billion in accounting errors at Freddie Mac, requires the government-chartered company to set aside 30 percent more capital than normal and to limit its $709.2 billion mortgage portfolio to 2 percent annual growth.

``I don't think it will be an issue with Ofheo,'' Syron said, referring to the regulatory constraints on capital.

Ofheo spokeswoman Corinne Russell declined to immediately comment.

New Loan Products

Freddie Mac, Fannie Mae, lawmakers and regulators have been looking for ways to curb a surge in mortgage delinquencies and foreclosures among subprime borrowers, or people with poor or incomplete credit records.

At least 50 mortgage lenders have gone bankrupt, closed operations or sought buyers since the beginning of last year as the effect of looser lending standards, slowing home-price gains, and less wage growth left banks holding bad loans.

Many defaults ``are occurring in the first few months after the loan was originated,'' Syron said in testimony yesterday. ``This suggests that many subprime borrowers have mortgages that should not have been made in the first place, at any price.''

Freddie Mac's new loan products will include more ``stable'' financing, including fixed-rate mortgages of as long as 40 years and adjustable-rate mortgages with longer fixed-rate periods, Syron said yesterday in testimony to the House Financial Services Committee.

``We have to work with the originators and see what it is they are interested in doing,'' Syron said today in an interview. ``We cannot develop products on our own.''

The $6.5 trillion in mortgage-backed securities comprise the world's biggest fixed-income market, exceeding the $4.3 trillion in U.S. Treasury securities and $5.4 trillion in corporate debt, according to the Securities Industry Financial Markets Association.

To contact the reporters on this story: James Tyson in Washington at jtyson@bloomberg.net

Last Updated: April 18, 2007 14:31 EDT