Freddie Mac toughens sub-prime lending standardsMortgagepress.compayment shock, foreclosure, adjustable-rate mortgages
Freddie Mac has announced that it will cease buying sub-prime
mortgages that have a high likelihood of excessive payment shock
and possible foreclosure.
First, Freddie Mac will only buy sub-prime adjustable-rate
mortgages (ARMs) - and mortgage-related securities backed by these
sub-prime loans - that qualify borrowers at the fully indexed and
fully amortizing rate. The goal is to protect future borrowers from
the payment shock that could occur when their ARMs increase.
Second, the company will limit the use of low-documentation
underwriting for these types of mortgages to help ensure that
future borrowers have the income necessary to afford their homes.
There will be a reasonableness standard for stated incomes.
Freddie Mac will implement the new investment requirements for
mortgages originated on or after Saturday, Sept. 1 to avoid market
"Freddie Mac has long played a leading role in combating
predatory lending and putting families into homes they can afford
and keep," said Richard F. Syron, chairman and CEO of Freddie Mac.
"The steps we are taking today will provide more protection to
consumers and enhance the level of underwriting standards in the
John M. Robbins, CMB, chairman of the Mortgage Bankers
Association, disagreed with Freddie Mac's decision. According to
Robbins, Freddie Mac's revised standards " ... will limit the
product options and the access to credit for those individuals most
in need, many of whom are first-time, undeserved or minority
homebuyers. The mortgage products that these new standards target
are important financial instruments, crucial to helping borrowers
get into homes and repair their credit. Regulation that further
limits consumer choice is unwarranted."
In addition, Freddie Mac will require that loans be underwritten
to include taxes and insurance and will strongly recommend that the
sub-prime industry collects escrows for taxes and insurance, as is
the norm in the prime sector. Because the maintenance of escrow
accounts requires significant infrastructure and is not widely used
in the sub-prime sector, Freddie Mac did not believe it was
practical to unilaterally mandate it as a purchase requirement at
the time of the announcement.
"Escrowing for taxes and insurance clearly provides an added
layer of consumer protection," Syron said. "It is our hope that
this universal practice in prime lending today becomes the
universal practice in sub-prime lending tomorrow."
For more information, visit www.freddiemac.com.