McLEAN, Va. -- Freddie Mac is putting an end to purchasing subprime mortgages that have a high likelihood of excessive payment shock and possible foreclosure.
Under the new plan, Freddie will only buy subprime adjustable-rate mortgages--and mortgage-related securities backed by these subprime loans--that qualify borrowers at the fully-indexed and fully-amortizing rate. The effort comes as Freddie moves to protect future borrowers from the payment shock that can occur when adjustable rate mortgages increase.
The company will limit the use of low-documentation underwriting for ARMs to help ensure that future borrowers have the income necessary to afford their homes. It will also strongly urge mortgage lenders collect escrow accounts for borrowers' taxes and insurance payments. It will implement the new investment requirements for mortgages originated on or after September 1, 2007, to avoid market disruptions.
Freddie Mac is also working on fixed-rate and hybrid ARM products that will provide lenders with more choices to offer subprime borrowers. The new hybrid ARMs will limit payment shock by offering reduced adjustable rate margins; longer fixed-rate terms; and longer reset periods. Freddie will require originators to underwrite these products at the fully indexed and amortizing rate.