U.S. mortgage buyer Freddie Mac on Wednesday said it will purchase $20 billion in fixed-rate and hybrid adjustable-rate mortgage products to provide more stable financing alternatives for borrowers of high-risk subprime loans.
The subprime lending segment has been in turmoil after rising defaults caused Wall Street investors to pull back on purchasing these loans, which in turn caused several subprime lenders to go out of business.
A congressional committee held a hearing on Tuesday where the heads of Freddie Mac and Fannie Mae each said that the companies are developing new loan types to help distressed borrowers with high-risk mortgages to keep their homes.
A key federal regulator during Tuesday’s hearing also urged lenders to extend flexible terms to struggling borrowers.
Freddie Mac’s announced products, currently under development by the company and slated to be introduced by mid-summer, will limit payment shock by offering reduced adjustable-rate margins, longer fixed-rate terms and longer reset periods, the company said.
“The problems facing borrowers in this segment of the market are of deep concern to Freddie Mac. Two months ago, we announced several pro-borrowers steps, including the enhanced underwriting standards and more consumer-friendly mortgage products for borrowers with impaired credit,” Richard F. Syron, chairman and CEO of Freddie Mac said in a statement Wednesday.
“Today, we’re again ramping up our commitment through this $20 billion pledge to assist families caught up in the subprime crisis and to make the market more stable and transparent for all borrowers,” he said.
The commitment follows Freddie Mac’s recent announcement that it will cease buying subprime mortgages that have a high likelihood of excessive payment shock and possible foreclosure. Among other things, the company will require that subprime ARMs — and mortgage-related securities backed by these subprime loans — qualify borrowers at the fully indexed and fully amortizing rate.
The company also said it will limit the use of low-documentation products in combination with these loans; require that loans be underwritten to include taxes and insurance; and strongly recommend that the subprime industry collect escrows for taxes and insurance, as is the norm in the prime sector.