GSEs Set Cutoff Date for Noncompliant 'Exotics'

Fannie Mae and Freddie Mac say they will stop purchasing interest-only and payment-option mortgages on Sept. 13 if the loans do not comply with the nontraditional mortgage guidance issued last fall by federal banking regulators.The mortgage giants are taking this action at the direction of their regulator -- the Office of Federal Housing Enterprise Oversight -- and they issued notices to their sellers about the coming changes. "It is Freddie Mac's expectation that sellers will comply with the guidance, and that regulated sellers will do so in a manner consistent with their regulators' interpretation and application," the government-sponsored enterprise said. Fannie Mae also notified its sellers about the guidance and served noticed that OFHEO expects the GSEs to adopt the subprime guidance next. "Accordingly, we expect to issue a subsequent announcement related to the Subprime Guidance in the near future," Fannie said. The federal banking agencies issued the subprime guidance on June 29. OFHEO Director James Lockhart predicted that Fannie's and Freddie's actions will force unregulated lenders that sell nontraditional and subprime loans to the GSEs to comply with new standards. "This is a significant step," Mr. Lockhart said.