Freddie Mac says Whoa!

Freddie Mac has announced that it will not continue to purchase sub-prime adjustable rate mortgages (ARM's) when the borrower has qualified only on the introductory, or teaser interest rate after September 1, 2007.  Borrowers will need to qualify on the fully indexed rate. Additionally, Freddie will restrict limited or no documentation loans. This action essentially represents the corporation saying to lenders "...quit lending to people who cannot afford it, or we will no longer buy your loans..."

This proposed action begs a number of questions:

Just who is Freddie Mac? and, What impact will this have on the local market? 

Who is Freddie Mac?

Freddie Mac is a stockhoder-owned (NYSE: FRE) corporation, chartered by Congress with the goal of providing competition, stability, liquidity and opportunity in the mortgage market. In an oversimplified nutshell, Freddie and his 'cousins' Fannie Mae and Ginnie Mae, are institutions that purchase loans from primary lenders that meet certain criteria, referred to as "Conforming" products, then  sell them to investors, generally in the form of securities.  The result is that the primary lenders in the mortgage market have a fresh, stable source of cash to make new loans.  For more information on Freddie, click on the link at the bottom of this post.

 
What impact will this have?  That depends on who you are...

Are you a borrower that was looking to buy a home that you otherwise would not be able to afford using a low documentation loan or an ARM with a low teaser rate? 

If so, you are both in luck and out of luck. You are out of luck unless you can close one of these products before 9/1/07 (and many lenders are already taking these products off the 'shelves').  You are in luck because you will not be entering onto a product that puts your financial health, your home's equity and your credit at risk.

Are you a borrower who is looking to rehabilitate their credit, or purchase a home now, with the promise of increased income on the near horizon?

You may be a victim of unfortunate circumstance.  Many in the banking industry are quick to point out this potentially negative impact.  They contend (rightly, I think) that many recent borrowers are people with either poor credit or lower income, who would qualify using one of these low doc, or adjustable rate products, then make their payments on time for several years, or otherwise see thier financial situation improve, in either case to the point that they could then refinance into a more stable, economically feasable product.  I know what you are saying...multiple or continuing refinancing is a red flag for a predatory lender...and you are correct, but if done properly, this has proved to be an effective tool for many to regain their financial health. If we determine that a potential borrower is considering scenario's that would have a negative impact on their situation financially, we will work with them to re-evaluate their goals, but we do not put people into loans that do not make sense. Depending on whose numbers you choose to refer to, it is estimated that around 10% of these loans are delinquent, but that means that 90% are not.  I am personally working with several people on improving their credit in an effort to secure financing.   Heres a bit of a news flash - Many of these borrowers who are pre-disposed to borrowing in the sub-prime market are, in fact frequently able to secure financing outside of the sub-prime market. Additionally, we are frequently able to negotiate terms in our real estate purchase contracts that mitigate as much as possible, the financial burden on these buyers.  Several of these people have seen a valuable bullet removed from their gun with this change in policy. 

Either way, the pool of available mortgages and 'qualified' buyers will be reduced.  It is no secret that much of the fuel that fed our recent housing frenzy was the easy availability of mortgage capital. The good news is that those who do qualify will be much more likely to be able to afford their payments. 

There is one more class of people that this may impact....Freddie's stockholders.
Face it, Freddie is a business, and as such, the stockholders demand effective management.  When the last two quarters have seen a significant increase in the number of delinquent loans and the resultant reduction in cash flow/receivables, changes needed to be made. 
Whether you choose to believe that it was done for the protection of otherwise overextended borrowers, or the corporate bottom line, it is hard to argue the logic here.

• Freddie Mac Site

• Rate this Post!

  Select Your Rating:

  • 5 Stars (Excellent!)
  • 4 Stars
  • 3 Stars
  • 2 Stars
  • 1 Stars (Poor)

• Share this Post

  Share With A Friend:

  Your Name Your Email

  Friend's Name Friend's Email

  Optional Message

  Send

• Print
• Social Bookmarking

  Add to Bookmarks: