Freddie Nixes Mandatory Arbitration Clauses

Freddie Mac has announced that it will not invest in subprime mortgages originated on or after Aug. 1, 2004, that contain mandatory arbitration clauses.The government-sponsored enterprise said the policy is aligned with its existing prohibition on the use of mandatory arbitration for prime mortgage investments, and touted its status as the first secondary-market investor to adopt such a stance. "Freddie Mac believes that all homeowners should be able to voluntarily choose the mortgage dispute resolution option they believe to be in their best interests," said Paul Peterson, Freddie Mac's chief operating officer. The GSE said some lenders have improved consumer protections when using mandatory arbitration clauses, but added that practices in the subprime market are uneven. "As a result, there exists the greater likelihood that borrowers may be unaware that they are agreeing to be bound by this dispute resolution mechanism," Freddie Mac said. The Department of Housing and Urban Development and the Federal Trade Commission have recommended banning mandatory arbitration agreements under the Home Ownership and Equity Protection Act and for high-cost home loans, the company said. Freddie Mac owns about $13 billion in subprime loans in its retained portfolio. The GSE can be found online at http://www.freddiemac.com.