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Money, Meet Mouth: Freddie to Buy $20 Billion in Subprime Loans

Editor's update: Perhaps the best analysis of this I've seen of this news is over at Calculated Risk. Be sure to read what's been written over there to get some perspective on this, especially if you work in the mortgage industry. Freddie Mac (NYSE: FRE) said Thursday that it will purchase $20 billion in fixed-rate and hybrid ARM products in an effort to provide lenders with more choices to offer subprime borrowers. The products, currently under development by the GSE and slated to be introduced by mid-summer, will limit payment shock by offering reduced adjustable rate margins, longer fixed-rate terms, and longer reset periods, the company said. The $20 billion commitment was made Thursday by Freddie Mac Chairman and CEO Richard F. Syron at the Homeownership Preservation Summit convened by Sen. Christopher J. Dodd (D-CT) and attended by Sen. Richard Shelby (R-AL). "We appreciate Senator Dodd's ongoing leadership in addressing the subprime issue. The problems facing borrowers in this segment of the market are of deep concern to Freddie Mac. Two months ago, we announced several pro-borrowers steps, including the enhanced underwriting standards and more consumer-friendly mortgage products for borrowers with impaired credit," said Richard F. Syron, chairman and CEO of Freddie Mac. "Today, we're again ramping up our commitment through this $20 billion pledge to assist families caught up in the subprime crisis and to make the market more stable and transparent for all borrowers."
The commitment follows Freddie Mac's recent announcement that it will cease buying subprime mortgages that have a high likelihood of excessive payment shock and possible foreclosure. Among other things, the company will require that subprime adjustable-rate mortgages (ARMs) – and mortgage-related securities backed by these subprime loans – qualify borrowers at the fully-indexed and fully-amortizing rate. The company also will limit the use of low-documentation products in combination with these loans; require that loans be underwritten to include taxes and insurance; and strongly recommend that the subprime industry collect escrows for taxes and insurance, as is the norm in the prime sector. For more information, visit http://www.freddiemac.com.
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