WASHINGTON · Mortgage giant Freddie Mac said Tuesday it will no longer buy high-risk home mortgages that it deems to be highly vulnerable to foreclosure.
The surprise move came amid a deteriorating market for subprime loans affected by slumping home prices and rising interest rates.
The government-sponsored company, which is the second-biggest financer of home loans in the United States, said it will begin using stricter standards for mortgages that it buys — including limiting the use of loans requiring less documentation of the borrower’s status than conventional mortgages. The goal is “to help ensure that future borrowers have the income necessary to afford their homes,” McLean, Va.-based Freddie Mac said.
“The steps we are taking today will provide more protection to consumers and enhance the level of underwriting standards in the market,” Richard Syron, the company’s chairman and CEO, said in a statement. The changes will take effect Sept. 1.
Roughly half the subprime mortgage-backed securities that Freddie Mac now owns would likely fall short of the new standards, the company estimates. The company’s new standards cover certain types of hybrid adjustable-rate mortgages that comprise about three-quarters of the subprime market. An adjustable-rate mortgage is considered a higher-risk loan because it typically draws borrowers in with an initial low, or “teaser” rate, which can rise substantially over time.
In a bid to promote a change in the home-loan market, Freddie Mac also said it will “strongly recommend” that banks and other mortgage lenders hold money from borrowers in escrow for paying taxes and insurance.
Fannie Mae, the company’s larger government-sponsored sibling and rival in the $8 trillion home-loan market, said it would wait for forthcoming guidance from regulators on unconventional mortgages before acting.
Home-mortgage delinquencies and foreclosures are surging, especially for people who took out subprime mortgages — higher-interest loans for those with blemished credit records or low incomes who are considered higher risks — during the sizzling housing boom that waned in the latter half of 2005.