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Freddie Mac has jumped ahead of regulators in clamping down on loose-lending practices associated with 2/28 ARMs that are contributing to rising defaults and foreclosures on subprime loans.
Starting Sept. 1, the mortgage giant said it will stop purchasing subprime ARM securitizations unless the underlying loans are underwritten at the fully indexed and fully amortizing rate.
Freddie also wants lenders to take into account the borrowers' ability to pay taxes and homeowners insurance, but it stopped short of requiring escrow accounts on subprime adjustable-rate mortgages.
The government-sponsored enterprise also put the brakes on no- and low-documentation loans where lenders don't verify the borrowers' income or assets. And it will only purchase stated- income, stated-asset loans in limited cases.
"The steps we are taking will provide more protection for consumers and enhance the level of underwriting standards in the market," Freddie chairman and chief executive Richard Syron said last week.
As a major investor in subprime mortgage-backed securities, Freddie Mac's announcement marks another blow for the subprime market that is already reeling from a loss of investor confidence. The GSE currently holds $185 billion in "AAA" rated subprime MBS in its $700 billion mortgage portfolio.
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