Industry News

Freddie Mac issues new restrictions on subprime hybrid ARMs

New underwriting requirements take effect Sept. 1

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Government-sponsored mortgage repurchaser Freddie Mac says that beginning Sept. 1 it will buy subprime adjustable-rate mortgages only if buyers are qualified at the fully indexed and fully amortizing rate. Freddie Mac will also limit the use of low-documentation underwriting for subprime ARMs and "strongly recommend" that lenders collect escrow accounts for borrowers' taxes and insurance payments. In instituting new, tougher standards for qualifying borrowers who take out hybrid ARMs such as 2/28 and 3/27 loans, Freddie Mac appears to be a step ahead of lawmakers and regulators. In September, federal banking regulators issued new guidance to federally chartered banks, saying they should qualify borrowers using payment-option and negative-amortization mortgages using the fully indexed rate. Pointing to the potential for "payment shock" and a rise in delinquencies and foreclosures, influential Democrats on the Senate Committee on Banking, Housing and Urban Affairs want the guidelines e...