- The Washington Times - Tuesday, February 27, 2007

ASSOCIATED PRESS

Mortgage giant Freddie Mac said yesterday it will no longer buy high-risk home mortgages that it deems to be highly vulnerable to foreclosure. The surprise move occurred in a deteriorating market for subprime loans affected by slumping home prices and rising interest rates.

The government-sponsored company, which is the second-biggest financier of home loans in the United States, said it will begin using stricter standards for mortgages that it buys — including limiting the use of loans requiring less documentation of the borrower’s status than conventional mortgages.

The goal is “to help ensure that future borrowers have the income necessary to afford their homes,” McLean-based Freddie Mac stated.

“The steps we are taking today will provide more protection to consumers and enhance the level of underwriting standards in the market,” said Chairman and CEO Richard Syron.

The changes will take effect Sept. 1, the company said, to avoid disrupting the mortgage market.

Roughly half the subprime mortgage-backed securities that Freddie Mac now owns would likely fall short of the new standards, the company estimates.

The company’s new standards cover certain types of hybrid adjustable-rate mortgages that compose about three-quarters of the subprime market. An adjustable-rate mortgage is considered a higher-risk loan because it typically draws borrowers in with an initial low, or “teaser” rate, which can rise substantially over time.

In a bid to promote a change in the home-loan market, Freddie Mac also said it will “strongly recommend” that banks and other mortgage lenders hold money from borrowers in escrow for paying taxes and insurance.

Fannie Mae, the company’s larger government-sponsored sibling and rival in the $8 trillion home-loan market, said it would wait for forthcoming guidance from regulators on unconventional mortgages before acting.

“We believe the best course of action is to receive this guidance, develop a full compliance plan and act accordingly,” said Fannie Mae spokesman Brian Faith.

Delinquencies and foreclosures are surging, especially for people who took out subprime mortgages — higher-interest loans for those who are considered higher risks — during the housing boom.

Write-offs of home mortgage loans by banks and thrifts reached a three-year high in the fourth quarter last year, according to the Federal Deposit Insurance Corp. And several financial companies that specialize in subprime mortgages have seen their shares plummet in recent weeks, roiling the industry sector.

Low-documentation, interest-only and other nontraditional mortgages, which are riskier than conventional home loans, have soared in popularity in recent years and raised concern about defaults if borrowers cannot meet rising mortgage payments.

Fannie Mae and Freddie Mac were created by Congress to pump money into the mortgage market by buying home loans from banks and other lenders in order to keep interest rates low and make home ownership affordable for low- and moderate-income people. The two companies bundle the mortgages into securities for sale on Wall Street.

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