If the nontraditional mortgage guidance applies to the underwriting of all adjustable-rate mortgages, then Fannie Mae and Freddie Mac may be precluded from purchasing most of the subprime mortgage-backed securities issued by mortgage bankers, according to Friedman Billings Ramsey researchers.The two secondary-market agencies purchased nearly half of all triple-A rated subprime MBS issued in 2005, according to FBR research director Michael Youngblood. He pointed out that a majority of the underlying subprime loans, such as 2/28 ARMs, don't conform to the nontraditional mortgage underwriting guidance, which the Office of Federal Housing Enterprise Oversight recently directed Fannie and Freddie to follow. Two/28 ARMs represent 62% of all subprime lending. "If our reasoning holds, Fannie and Freddie may be precluded from acquiring a majority of subprime securities that they previously purchased," Mr. Youngblood said. "We know as a fact" that the two agencies purchased most of their subprime securities in 2005 from mortgage banking companies that don't have to comply with the recently issued guidance, the FBR researcher said.

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