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Freddie Mac and the Subprime Market
Freddie Mac was chartered to provide stability, liquidity and affordability to the nation’s residential mortgage markets – and this includes the subprime market. Over the past decade, the subprime market has experienced a profound transformation, in size, investor interest and mortgage type. Using the tools of securitization and automated systems pioneered in the prime mortgage market, Wall Street and the global capital markets transformed the subprime market from a relatively small portfolio-based market that specialized in debt-consolidation refinances for credit impaired borrowers into a major market segment. Representing about 15 percent of all single-family debt outstanding, today’s subprime market provides home purchase mortgages as well as refinances to a much wider set of borrowers, including those with limited equity in their homes. By the summer of 2007, however, the subprime market experienced a dramatic change. The subprime market largely collapsed over concerns about the credit quality of the underlying mortgages, and gave rise to a "credit crunch" in the global financial markets. Freddie Mac Responds to the Subprime CrisisFreddie Mac is actively working to meet the challenges of the current turmoil in the subprime mortgage market. Our response is in keeping with our mission to bring liquidity, stability and affordability to the nation's residential mortgage market in all economic environments. It includes a major investment in new subprime products, tougher underwriting standards, aggressive foreclosure prevention efforts, as well as borrower education and anti-predatory lending initiatives. These and other actions aim to stabilize markets by ensuring an uninterrupted supply of liquidity to the housing sector, while strengthening investor confidence here and abroad in the resiliency of the U.S. mortgage market. By stepping up our mortgage purchases and investments, we help keep mortgage rates low, stable and affordable for millions of families seeking to purchase or refinance homes they can afford and keep. A Responsible InvestorOver the years, our participation in the subprime market has been as a responsible investor – and we continue to take that role very seriously. InvestmentsFreddie Mac participates in the subprime market by investing primarily in highly rated AAA bonds backed by subprime mortgages. Given our role as a GSE, we chose this financing strategy as a prudent way to provide liquidity to a largely untested segment of the mortgage market. These investments have been critical to our ability to meet our annual affordable housing goals. Beginning September 2007, Freddie Mac is restricting our subprime investments in securities backed by short-term hybrid adjustable-rate mortgages (ARMs) to those that have been underwritten to a fully-indexed, fully-amortizing level. We are also significantly restricting the use of stated income in lieu of more traditional documentation standards for subprime mortgages backing the securities we purchase. As an additional consumer protection, we are encouraging subprime lenders to escrow borrower funds for taxes and insurance. Helping Improve Subprime Market Lending PracticesSince 2000, Freddie Mac has taken unilateral, voluntary leadership positions that have helped improve subprime market practices. Read More:
Helping Consumers Make Good Mortgage ChoicesIn addition to helping set standards for sound mortgage lending, Freddie Mac also strives to help borrowers make good mortgage choices. Our Don’t Borrow Trouble® consumer awareness campaign helps consumers avoid predatory lending practices.We also assist consumers through our suite of multilingual credit education curriculum, CreditSmart®, CreditSmart® Espanol and CreditSmart® Asian.
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