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New policies re mortgages announced March 19, 2007

Posted by Jay Medina in News and Information.
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On February 27, Freddie Mac (one of the nation’s leading government-sponsored buyers of existing home mortgages) announced it will cease buying subprime mortgages that have a high likelihood of excessive payment shock and possible foreclosure. It will only buy subprime adjustable-rate mortgages (ARMs) that qualify borrowers at the fully-indexed and fully-amortizing rate. This means there will be fewer offerings of these loans to consumers.

The objective of Freddie Mac’s action is to protect future borrowers from the payment shock that could occur when their adjustment rate mortgages increase. It will also limit the use of low-documentation underwriting for these types of mortgages to help ensure that future borrowers have the income necessary to afford their homes. Also, it will strongly recommend that mortgage lenders collect escrow accounts for borrowers’ taxes and insurance payments. The new policies will take effect on all mortgages originated on or after September 1 of this year.

Freddie Mac also announced their development of fixed-rate and hybrid ARM products that will provide lenders with more choices to offer subprime borrowers. For example, in contrast to the payment structure of many of today’s “2/28” ARMs, the new hybrid ARMs will limit payment shock by offering reduced adjustable rate margins, longer fixed-rate terms, and longer reset periods.

However, it will require originators to underwrite these products at the fully indexed and amortizing rate. The company plans to commit significant capital to purchasing these loans into its portfolio.

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