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Subprime Relief from Fannie

Rescue products being developed

February 28, 2007


photo of Coco Salazar

Fannie Mae will not follow Freddie Mac's lead in tightening its purchases of subprime loans.

Fannie said it will instead focus on developing rescue mortgage products and take any further necessary steps after the guidance on nontraditional mortgages is released.

The Washington, D.C.-based company "is working with lenders to develop rescue mortgage products that will help borrowers who experience difficulty making payments when their rates adjust," said Brian Faith, a Fannie director, in a written statement. "The company also has measures in place to ensure that the subprime products the company buys, be it whole loans or securities backed by subprime loans, comply with our anti-predatory lending guidelines."

Mortgage bankers were not in favor of Freddie's announcement yesterday that it would only buy 2/28 and 3/27 hybrid adjustable-rate subprime mortgages, which reportedly account for roughly three-quarters of the subprime market, where borrowers were qualified at the fully-indexed rate.

McLean, Va.-based Freddie said the new requirements will further protect borrowers from payment shock and foreclosure and will enhance the level of underwriting standards in the market.

But Freddie's decision "will limit the product options and the access to credit for those individuals most in need, many of whom are first time, underserved or minority homebuyers," said John M. Robbins, chairman of the Mortgage Bankers Association, in a written statement.

"The mortgage products that these new standards target are important financial instruments, crucial to helping borrowers get into homes and repair their credit," MBA added. "Regulation that further limits consumer choice is unwarranted."

Freddie did find support for its move from the Leadership Conference on Civil Rights -- the self-described "nation's oldest, largest, and most diverse civil and human rights coalition."

"By cutting off financial backing for dicey, low interest 'teaser' loans that balloon astronomically, Freddie Mac will prevent families, a disproportionate number of whom are minorities, from losing their homes," the conference said.

"We genuinely hope Fannie Mae and other players in the mortgage market follow Freddie Mac's lead and adopt similar practices that are aimed at producing more responsible, repayable home loans," it added.

"We believe the best course of action is to receive [the nontraditional] guidance, develop a full compliance plan and act accordingly," Fannie's Faith said.

While recognizing the subprime market has been the principal means for many first-time borrowers, Fannie "entered the subprime market very carefully." Faith said. Subprime loans make up less than 4 percent of Fannie's total book of business, of which approximately 2.2 percent consists of subprime loans and securities backed by subprime loans and about 1.5 percent is made up of short-reset subprime ARMs.

In 2004, former Fannie Chairman Franklin D. Raines told community bankers the secondary lender intended to purchase more subprime loans. "Fannie is moving ahead with a concerted effort to serve the subprime market," Raines said at the time -- noting that about half of subprime borrowers have credit scores of 620 or higher.

Coco Salazar is an assistant editor and staff writer for MortgageDaily.com.

e-mail: [email protected]

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