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Freddie Keeps B&C Pledge, with Tighter Standards

Freddie Mac has issued and purchased its first subprime mortgage securitization as part of a $20 billion commitment to Congress to provide liquidity to the subprime market and safer underwriting standards.

The $105.6 million securitization has subprime and alt-A loans originated by Wells Fargo Home Mortgage, Des Moines.

The four pools in the structured pass-through security contain fixed-rate and adjustable-rate mortgages, including 2/28 ARMs with prepayment penalties. The maximum margin on the ARMs is 450 basis points.

Back in February, the government-sponsored enterprise said it would stop buying subprime ARMs that featured excessive payment shock and introduce safer subprime products in September.

These subprime mortgages would be underwritten at the fully indexed rate and feature reduced adjustable-rate margins.

Freddie accelerated its schedule to midsummer as Senate Banking Committee leaders turned to mortgage lenders and the GSEs to take constructive actions to stem problems in the subprime markets and rising foreclosures.

In response, Freddie chairman and chief executive Richard Syron pledged to purchase $20 billion in subprime loans to refinance troubled subprime borrowers.

The secondary market agency closed its first deal when it purchased the $105.6 million Freddie Mac-structured pass-through certificates (Series T-074) on July 30.

"Wells Fargo Asset Securities Corp. is acquiring the SPCs upon issuance for resale to us," according to the Freddie Mac prospectus.

The SPC includes one pool with interest rates ranging from 6.4% to 12% and FICO credit scores ranging from 550 to 752 with a weighted average score of 613.

Freddie spokesman Brad German noted the loans have a wide range of credit scores, interest rates, loan-to-value ratios, debt-to income ratios and other characteristics.

He said Freddie does not have a cookie-cutter model with every detail worked out. But the secondary market agency will work with lenders in putting pools together that meet a certain risk profile.

"The prospectus will give the market a strong idea of what we are looking to buy," Mr. German said.

However, he noted that Freddie is not purchasing subprime loans with stated incomes or loans on second homes or investment properties.

In related news, Freddie is hiking its delivery fee on certain Home Possible mortgages, which are low-downpayment loans geared towards helping teachers, police officers and firefighter become homeowners.

Effective Nov. 1, the delivery fee on Home Possible mortgages with an 80-10-10 secondary financing structures will be increased by 100 basis points, which will increase the interest rate on the loan by 1 percentage point.

This fee increase does not apply to Home Possible borrowers with incomes of 80% or below the area medium.

Freddie Mac noted in a bulletin addressed to its seller/servicers that home price appreciation has slowed or declined, delinquency rates are rising and it has to ensure that its pricing reflects current market risks.

"We believe this approach meets the dual needs of managing market risks while preserving vital opportunities for first-time homebuyers, low- and moderate-income borrowers, and borrowers purchasing homes in eligible disaster areas," the bulletin says.

And Freddie Mac executive Beth Luth, speaking at the California Mortgage Bankers Association's Western States Loan Servicing Conference last month, reiterated Freddie Mac's emphasis on reining in subprime underwriting.

"We'll have a little more restraint on that program going forward," she said.

For one thing, she told attendees that Freddie Mac will "greatly encourage" the use of escrow accounts on subprime loans, so that mortgage servicers control the payment of property taxes and insurance.

Ted Cornwell contributed to this report.

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