Important Changes to Freddie Mac Purchases of Short-Term Arms Consistent With Interagency Subprime Statement

On June 29, 2007 the federal banking agencies issued the interagency Statement on Subprime Mortgage Lending (Subprime Statement)that provided guidance to depositories regarding appropriate underwriting standards for short-term subprime ARMs. While we have not historically purchased mortgages that could be considered short-term subprime ARMs, we are notifying you as directed by our regulator, the Office of Federal Housing Enterprise Oversight, of changes to our requirements for short-term ARMs that we purchase in the future, consistent with the Subprime Statement.

Upcoming Requirements Changes for Bulk and Flow Purchases

We will be implementing changes as follows:

• Effective for mortgages with loan application dates on and after September 13, 2007 for bulk sale transactions and other negotiated structured transactions, ARMs that have a margin of 400 basis points or more and an initial fixed-rate period of three years or less must be underwritten at the fully indexed rate and fully amortizing payment to be eligible for sale through these paths. We believe that implementing this change provides a better understanding of the borrower’s capacity to repay and creates an underwriting standard for these mortgages that is further aligned with the Subprime Statement.
• For any such ARMs purchased through our bulk and structured transactions paths, we will require a representation and warranty that if the seller has relied on reduced underwriting documentation, that reliance has been consistent with the Subprime Statement.In addition, we will require a representation and warranty related to borrower disclosure which will address processes and controls to ensure that borrowers with such ARMs receive timely, written disclosure addressing payment shock, prepayment penalties, balloon payments, the cost of reduced documentation loans, and responsibility for taxes and insurance, as appropriate.These representations and warranties will be required regardless of whether the seller is a regulated institution to whom the Subprime Statement applies directly.
• As a practical matter, we would not expect prime ARMs with shorter initial fixed-rate periods sold under flow Master Commitments to have high margins, and in fact require reasonable rate and cap structures on our flow ARM products. However, our current Single-Family Seller/Servicer Guide (Guide) requirements do not include an explicit margin cap for these ARM products, making it theoretically possible for a short-term prime ARM with a high margin to be sold under a flow commitment.We will modify our requirements in an upcoming Guide Bulletin so that effective on and after October 20, 2007 we will no longer purchase ARMs with loan application dates on and after September 13, 2007 that have initial periods of three years or less and margins of 400 basis points or more through our flow purchase paths.We view this change largely as a technical change.

Additional Information

• The changes announced in this e-mail will be included in a future Guide update.
• At this time we do not anticipate changes to Loan Prospector® or the selling system as a result of these additional requirements.

We appreciate your ongoing support of our shared position of promoting responsible lending and successful homeownership through efforts that contribute to an efficient and vibrant housing finance system. As always, contact your Freddie Mac representative for additional information.