Wednesday, March 7, 2007

Freddie Mac to cut down on subprime lending

Freddie Mac, one of the biggest buyers of home mortgages in the U.S., announced that, as of September 1st, 2007, it will no longer purchase subprime loans and loans that carry potential risk of payment shock. It will also stop buying loans that require little to no documentation.

Now this I call sound business practice. It was high time someone recommended better standards and a company as big as Freddie Mac can actually influence the market. Since the changes will take effect as far in the future as September, the impact of this news will not be immediate and yet, I guess many lenders who depend on the company will take notice.

Freddie Mac said it is developing new fixed-rate and hybrid adjustable-rate mortgage products to provide more choices for borrowers. An estimated 50% of the mortgage-backed securities currently owned by Freddie Mac won’t comply with the new standards, so are we in for brand-new types of loans? It seems that more exciting news is on the way, but I wonder what portion of those who took out subprime mortgages in the past will qualify for the new products.

The company also recommends that banks and lenders hold money from borrowers in escrow for paying taxes and insurance, a common practice in prime lending that could help improve subprime lending standards.

Fannie Mae, the mortgage giant’s sister-company, said it would wait for guidance from federal regulators before acting, as its exposure to the subprime segment is “low”.

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