Freddie Mac to stop buying some mortgages

December 23, 1990

Freddie Mac said last week that it will phase out purchases of single-family home mortgages with reduced borrower credit documentation as well as adjustable-rate mortgages with low down payments.

The action by the Federal Home Loan Mortgage Corp. reflects a general secondary-market trend away from these types of loans. For example, in late October, the Federal National Mortgage Association announced tightening of its reduced-documentation programs.

Specifically, Freddie Mac will gradually phase out, then discontinue after March 31, 1991, its purchase of mortgages with reduced documentation, as well as ARMs with loan-to-value ratios above 90 percent. Freddie Mac will continue to honor enlisting commitments beyond March 31, 1991.

"Freddie Mac continually revises and adjusts its mortgage program standards to changing market trends," said Leland C. Brendsel, Freddie Mac's chairman and chief executive officer. "Our underwriting standards during the past year have increasingly focused on the borrower and lender, as well as the property. These changes continue this trend.'

Freddie Mac will limit the purchase of certain other home mortgages, including second mortgages, home mortgages involving "third-party sources" such as brokers, and mortgages with high interest-rate buy-downs or long buy-down periods.

After March 31, the company will purchase these types of mortgages through negotiated transactions rather than through its standard guarantor or cash programs.

"Although purchases of reduced-documentation mortgages are being phased out, Freddie Mac will continue buying mortgages that allow for alternative forms of documentation, such as paycheck stubs, W-2 forms, and income and bank statements.

"These alternative forms of documentation enable originators to expedite processing because they can be submitted at the time of application without sacrificing the quality of credit underwriting," said Michael Stamper, Freddie Mac's executive vice president of risk management.

In addition, effective Jan. 2, the corporation will purchase a maximum of $10 million in mortgages annually from an individual seller on a non-negotiated basis.

Lenders are encouraged to negotiate amounts above the $10 million limit. The combination of the S10 million purchase amount and the availability of negotiated commitments above that amount, officials said, will match the needs of every customer for access to Freddie Mac's competitive products, pricing and services with the corporation's risk-management requirements.

Freddie Mac is a stockholder-owned corporation chartered by Congress in 1970 to create a continuous flow of funds to mortgage lenders in support of homeownership and rental housing.

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