Lending giant Freddie Mac it’s no longer purchasing subprime ARMs loans that have the potential to shock homeowners with escalating mortgage payments.
In an announcement released Monday, the government-sponsored enterprise (GSE) said it would only buy adjustable-rate-mortgages that qualify borrowers at the fully-indexed and fully-amortizing rates. The change is part of a new plan in which Freddie Mac will implement tougher underwriting guidelines on subprime loans. The new policies, which take effect in September, will limit the use of low-documentation underwriting on certain at-risk mortgages to ensure borrowers have the income needed to sustain homeownership. The company also said it will recommend that mortgage lenders collect escrow accounts for borrowers’ taxes and insurance payments.

In a prepared press release, the company said, “To help lenders better serve borrowers with impaired credit, Freddie Mac is also developing fixed-rate and hybrid ARM products that will provide lenders with more choices to offer subprime borrowers.” However, the products will vary from the traditional structures commonly seen on  today’s “2/28” ARM loans since Freddie Mac’s products will eliminate payment shock by “offering reduced adjustable rate margins, longer fixed-rate terms, and longer reset periods.”
“Freddie Mac has long played a leading role in combating predatory lending and putting families into homes they can afford and keep,” said Richard F. Syron, chairman and CEO of Freddie Mac. “The steps we are taking today will provide more protection to consumers and enchance the level of underwriting standards in the market.
Click here read the full press release from Freddie Mac.