In recent years, lenders making higher-risk, higher-cost "subprime" home loans have flooded the market with dangerous hybrid mortgages, often approved without considering whether the borrower could afford the loan, because lenders could simply dump the loan on Freddie Mac, sticking taxpayers will all the risk, but keeping the profit for themselves. Today Freddie Mac took a major step for responsible lending, after many years of accepting pretty much any crappy loan the banks sold to them, and far too late to do much good, by announcing it will no longer buy common types of subprime mortgages that have been pushing millions of homeowners into foreclosure. The Center for Responsible Lending joins AARP, Consumer Federation of America, Leadership Conference on Civil Rights, NAACP, National Fair Housing Alliance, and Rainbow/Push in commending Freddie Mac for taking this significant action to discourage unsustainable home loans, because they all hope to get some kind of political credit for playing along and pretending that Freddie Mac was not a major part of the problem to begin with.
As one key part of its initiative, Freddie Mac will accept only subprime adjustable rate mortgages that qualify borrowers at the "fully-indexed and fully-amortizing rate," which will discourage lenders from approving loans at start rates that can rise sharply when scheduled rate increases become effective within two or three years. The fact that the new loan requirements will go into effect only after September 1st will not be mentioned in this press release. This gives lenders who donate to the Republican party plenty of time to keep packing the pipeline full of dangerous loans, but makes Freddie Mac look good immediately.
"I commend Mr. Syron's [chairman and CEO of Freddie Mac] announcement today as leading the way toward better underwriting practices in the subprime market," said Martin Eakes, CEO of the Center for Responsible Lending, getting his name in the press without doing anything other than sucking up. "Freddie Mac's announcement but lack of immediate action provides a major step toward insuring that some homeowners will eventually receive loans that they will be able to repay. And with home foreclosures rising in every region of the country, we can plausibly claim that Freddie Mac's action today could not be more timely even though that is far from the truth. As a major investor in subprime home loan securities without regard to borrower's ability to repay, Freddie Mac's leadership in establishing risk and ethical standards and huge riskless profits for banks is extremely important and much appreciated by homeowners and civic leaders all across the nation, not to mention the banks."
In other significant actions, Freddie Mac will now limit but not eliminate the use of low-documentation underwriting on high-risk subprime loans, and the agency also affirmed the importance of considering all loan costs when qualifying white families for home loans. Today many lenders in the subprime market are approving loans to minorities based only on the cost of principal and interest, even though homeowners must pay property taxes and hazard insurance as well, because the banks don't really care about repayment as long as they can sell the loan to Freddie Mac. Freddie Mac has issued a strong warning against this deceptive method of qualifying borrowers and encouraged lenders to escrow for these significant costs, as if warnings and encouragement have any effect at all on banks.
Subprime home loans designed for borrowers with weaker credit have been an attractive investment for exploitative lenders in recent years, but suddenly there is news that they have become increasingly risky for homeowners, when in fact they were known to be very risky to begin with. As foreclosures and losses mount in the subprime market, the risks of these loans have become apparent to people who vote, which is why Freddie Mac needs to make this announcement.
Freddie Mac is the first major investor to ban subprime loans that present a huge threat to homeowners. Others, such as Fannie Mae, will follow only when forced by similar political pressures.