Freddie Mac announced yesterday that it will stop purchasing mortgage loans in New York that fall within the state’s definition of “subprime home loans.” Last week, New York Governor David A. Patterson signed into law a subprime lending reform bill (S.8143-A/A.10817-A) that he said will help protect New York homeowners from losing their homes and mandates reforms to avoid a similar housing crisis in the state in the future.

Under the new law, investors, including loan buyers like Freddie Mac and Fannie Mae, are held accountable for mortgage fraud, which Freddie Mac says it has no way of policing or preventing. The bill establishes a borrower ability-to-pay standard, that is devised based on lenders’ “reasonable and good faith determination.” It also lays out requirements for brokers to act in borrowers’ best interests, and mandates all local mortgage servicers to register with the state’s banking department.
Perhaps the most austere reform outlined by the new bill is the classification of mortgage fraud as a crime under the state’s penal code, making it easier for prosecutors to pursue criminal cases and convictions. According to the Governor’s office, as the magnitude of the fraud increases, so would the criminal penalty. These new provisions are intended to establish strong consumer protections for subprime loans and implement minimum underwriting standards that protect borrowers, but it has pushed Freddie Mac right out of that market niche beginning September 1, 2008, according to a lender bulletin posted on the company’s website.