Freddie Mac Slashes Buys With Sub Prime
Tuesday, February 27, 2007SUSIE GHARIB: A major policy change today from one of the nation's mortgage giants, Freddie Mac. It will no longer buy sub-prime mortgages that are likely to default. The new policy takes effect this fall. As Stephanie Dhue reports, experts say the decision could curb a growing problem in the mortgage industry.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: Mortgage financer Freddie Mac says the problem is sub-prime loans that lead to a payment shock for borrowers when interest rates reset after two or three years. Freddie Mac CEO Richard Syron says the goal is to reduce loan defaults.
RICHARD SYRON, CEO, FREDDIE MAC: No one does anyone a favor by making them a loan they can't pay back and that may be, as much as anything else, what's driving this.
DHUE: Freddie Mac's new requirements will cover what's known as 2/28 and 3/27 hybrid adjustable rate mortgages. For loans made after this September, the company will require borrowers to be able to pay back a loan at its highest interest rate. Freddie will also stop buying no income, no asset loans and limit similar types of products.
SYRON: We're not cutting these things off completely. We're saying, when someone takes a loan out at the teaser rate, we want to be sure that they are underwritten on the basis that, gee, once the rate adjusts two years from now, they can still keep the house.
DHUE: Lawmakers have called on bank regulators to crack down on sub- prime lending practices. Allen Fishbein of the Consumer Federation says Freddie Mac's new approach should help make the case for tougher standards.
ALLEN FISHBEIN, HOUSING DIRECTOR, CONSUMER FEDERATION OF AMERICA: By having major market players like Freddie Mac make a statement like this, that will serve notice to others in the industry to clean up their practices and start responsibly underwriting loans.
DHUE: Last year, new sub-prime loans made up nearly 20 percent of the mortgage market and nearly 60 percent of foreclosures. Economist David Lereah of the National Association of Realtors says sub-prime mortgage lenders were losers when the housing market cooled.
DAVID LEREAH, CHIEF ECONOMIST, NATIONAL ASSOCIATION OF REALTORS: The bet there was that home prices would continue to rise and that did not happen in some of these locations. So both the borrower and the lender got caught with their financial pants down.
DHUE: Freddie Mac says it is working on new products for sub-prime borrowers, with longer fixed-rate terms and no sudden payment jumps. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
