Freddie Changes Subprime 2/28 Policies

Starting Sept. 1, Freddie Mac will stop purchasing subprime 2/28 ARM securitizations unless the loans are underwritten to the fully indexed rate and consideration is given to the borrowers' ability to pay taxes and insurance on their homes.The government-sponsored enterprise has been a major investor in subprime mortgage-backed securities, and it is changing its policies in response to regulatory and congressional pressures on the industry and the GSEs to clean up the underwriting of these subprime adjustable-rate mortgages, which are exhibiting extremely high default and foreclosure rates. Freddie also said it is developing subprime fixed-rate and hybrid ARM products that it will purchase for its mortgage portfolio. These subprime products will limit payment shock by offering reduced adjustable-rate margins, longer fixed-rate terms, and longer reset periods. In addition, the company will not purchase no-documentation loans. "The steps we are taking today will provide more protection for consumers and enhance the level of underwriting standards in the market," said Richard Syron, Freddie's chairman and chief executive officer. Freddie Mac current holds $185 billion in triple-A-rated subprime MBS in its $700 billion mortgage portfolio. The GSE can be found online at http://www.freddiemac.com.