This week Freddie Mac announced that it will no longer purchase common subprime mortgages, becoming the first major secondary market player to stop putting subprime into its portfolio. The announcement this week should be no surprise to those who follow Freddie's anti-predatory lending practices. Freddie has been at the forefront of this for some time.
Freddie Mac will still purchase subprime Adjustable Rate Mortgages (ARM's) and securities backed by these loans where the home buyers are qualified at the fully-indexed and fully-amortized rates. Freddie Mac, the secondary mortgage purchaser created by Congress in 1970, hopes that by limiting the purchase to only these types of subprime loans they can help home buyers avoid what Freddie calls "sticker shock" when the interest rates climb and payments rise beyond what the homeowner can then afford.
By taking these types of steps, Freddie Mac is attempting to help curb a problem that has had an undue influence in the real estate industry for some time, predatory lending and mortgage fraud. Previously, Freddie has taken other steps designed to help reduce the amount of predatory lending included in its portfolios. Some of those steps include requiring lenders provide complete credit information to all credit bureaus, refusing to invest in mortgages with single-premium credit insurance or investing in loans with prepayment penalties of more than three years. You can read more about Freddie's new policy online by clicking here.
Why is this important news? With investment in subprime loans at what seems to be an all-time high, many investors are becoming worried about an influx of even more foreclosures and bad debt into the marketplace. Even former Fed Chairman Alan Greenspan recently commented that the U.S. could possibly be led into a recession by the housing markets. By limiting risk in those markets, bad debt and foreclosures may be reduced over the long term, but will that help us now?
A report on CoStar.com written by Mark Heschmeyer talks about how defaults and delinquencies in the subprime markets are increasing concern that any unexpected "shock" to the U.S. economy could cause the housing markets to decline, and that might mean that Mr. Greenspan becomes a profit by the end of 2007 or early 2008.
I am of the opinion that if we slow down the availability of the subprime mortgage products and increase education and financial awareness requirements for those who are funded in these programs, the housing markets and direct real estate related industries will be better positioned to move forward, even if a decline precedes the positive effects of such policies. For Agents, keep in mind that all your subprime borrowers need to go another direction. Freddie Mac may not take them.