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review of Upcoming Changes to Credit Requirements; Recently Announced Updates and New Changes Included in October 17 Guide Bulletin[Updated November 12, 2008. Please note that these new requirements will be effective for mortgages with Freddie Mac settlement dates on or after March 1, 2009, not February 2, 2009 as previously announced.]

This Single-Family Advisory e-mail provides you with important information on a series of changes to our pricing and credit requirements.

  • First, we are providing a preview of new changes that we will finalize in a November Single-Family Seller/Servicer Guide (Guide) Bulletin and will make effective for Freddie Mac settlements on and after March 1, 2009. These changes strengthen underwriting standards for borrower eligibility and provide additional safeguards against layered risk to support sustainable homeownership opportunities, including:
    • Eliminating the purchase of mortgages originated with stated income and/or stated assets
    • Establishing minimum Indicator Scores and maximum debt-to-income ratio requirements for most mortgages we purchase – whether manually underwritten or assessed through an automated underwriting system

  • Second, we published a Guide Bulletin on October 17 that provided detailed requirements for the changes we previewed in our October 3 Single-Family Advisory e-mail. These changes are effective for Freddie Mac settlements on and after January 2, 2009, and reflect our focus on providing pricing and credit terms that are prudent and largely applicable in all market conditions.

  • Finally, our October 17 Guide Bulletin also included additional and not previously announced updates to our credit requirements for borrowers with significant derogatory credit information, and other credit changes for certain mortgages with higher risk characteristics. These changes are also effective for Freddie Mac settlements on and after January 2, 2009.

In aggregate, the changes we are previewing in this e-mail and those we published in the October 17 Guide Bulletin address underwriting standards that promote long-term homeownership for borrowers and liquidity for Sellers, while maintaining a sustainable secondary market business model.

Preview of Upcoming Changes to Credit Requirements

We are previewing the following changes to our credit requirements that will be effective for Freddie Mac settlements on and after March 1, 2009. We will finalize these credit changes in a November Guide Bulletin where we will:

  • Eliminate purchases of all mortgages originated with stated income and/or stated assets, including borrower selected programs, lender-branded and marketed programs, and system-selected programs such as Loan Prospector® Accept Plus.

  • Establish a maximum debt-to-income ratio of 45 percent for all mortgages we purchase, except for Streamlined Refinance Mortgages.

  • Revise requirements for minimum Indicator Scores by:
    • Establishing minimum Indicator Score requirements for manually underwritten mortgages secured by 1-unit primary residences as follows (Home Possible® Mortgages excluded):
      • 620 for LTV/TLTV/HTLTV ratios less than or equal to 75 percent
      • 660 for LTV/TLTV/HTLTV ratios greater than 75 percent
    • Establishing a minimum Indicator Score of 620 for all mortgages unless otherwise specified for a particular mortgage product in our Guide. Loan Prospector A-minus mortgages are also excluded from this requirement.
    • Revising minimum Indicator Scores for Home Possible® Mortgages and lender-branded affordable mortgages. Details for this change will be provided in a November Guide Bulletin.

      If the borrower does not have a usable credit score, Sellers must underwrite the mortgage according to the requirements in Guide Chapter 37.

  • Eliminate purchases of 40-year fixed-rate mortgages except for Home Possible Mortgages and other lender-branded affordable products secured by 1-unit properties.

  • Reduce the maximum LTV ratio requirements for Home Possible Mortgages and other lender-branded affordable mortgage products secured by 1-unit primary residences to:
    • 97 percent for mortgages assessed by Loan Prospector and other approved automated underwriting systems
    • 95 percent for manually underwritten mortgages
    We will continue to allow TLTV ratios greater than 97 percent and up to 105 percent for eligible Home Possible Mortgages and lender-branded affordable mortgages if the subordinate financing is an Affordable Second® and the borrower has a minimum Indicator Score of 700.

Delivery Fee Rate and Credit Requirements in the October 17 Bulletin

With our October 17 Guide Bulletin, we provided final requirements for the delivery fee rate increases and credit changes we previewed in early October, and announced several additional changes to our credit requirements. It is important that you review in the October 17 Guide Bulletin [PDF 183K] in detail to prepare for these changes, effective for mortgages with Freddie Mac settlements on and after January 2, 2009.

Credit and Pricing Requirements Previewed on October 3:

  • Eliminate the previously announced 25 basis point increase to the Market Condition delivery fee, scheduled to go into effect on November 7, 2008.

  • Provide detailed pricing and credit requirements for mortgages with higher conforming loan limits in certain high-cost areas, which we've termed "super conforming" mortgages.

  • Update delivery fee structures and fee rates for Initial Interest® Mortgages and mortgages with secondary financing, and revise the Number of Units delivery fees to better align our pricing with the risks inherent in these products.

  • Change requirements for certain mortgages, including, among others, manually underwritten mortgages, Streamlined Refinance Mortgages, mortgages sold to us more than 120 days after the note date, and mortgages secured by investment properties, 2-unit properties, and second homes.

Additional Modifications to Super Conforming Mortgage Requirements in the October 17 Guide Bulletin:

Updates to Borrower Credit Reputation Requirements in the October 17 Guide Bulletin:

  • Allow authorized user tradelines to be included in determining a borrower's credit reputation only under certain circumstances as detailed in October 17 Guide Bulletin.

  • Require that a borrower's derogatory credit information be considered significant if there is a short payoff related to a delinquent mortgage obligation within the last seven years.

  • Extend the required recovery period needed to re-establish an acceptable credit reputation for prior foreclosures and multiple bankruptcies, whether for extenuating circumstances or financial mismanagement.

  • Eliminate the requirement to calculate or evaluate the debt-to-housing gap ratio when determining a borrower's capacity to meet monthly obligations.

Additional Revisions to Credit Requirements in the October 17 Guide Bulletin:

  • Add new requirements for the purchase of a new primary residence when the sale of the existing primary residence has not yet closed or the existing primary residence is being converted to a second home or investment property.

  • Eliminate purchases of seasoned mortgages through our flow sales paths.

  • Eliminate purchases of Seasoned Mortgages for Newly Constructed Homes products through our flow sales paths. For these mortgages to be eligible for delivery through our flow sales paths, the settlement date or delivery date, as applicable, must be on or before the last day of the 18-month credit/construction/settlement period.

  • Reaffirm that refinance mortgages must be documented with a new note and new security instrument or with a new note and a modification of the existing security instrument. If there is no new security instrument, the refinance mortgage must be delivered to Freddie Mac as a Seller-owned Modified Mortgage.

  • Eliminate purchase of Alternative Stated Income Mortgages, and remove references to these mortgages from the Guide as a precursor to changes across all stated income and/or stated asset products, which we previewed above and will finalize in a November Guide Bulletin.

Updates to Delivery Requirements in the October 17 Guide Bulletin:

  • Introduce a new Special Characteristic Code D99 that exempts Freddie Mac-owned no cash-out refinance mortgages secured by second homes and 2-unit primary residences when the new mortgage is not paying off subordinate financing from the LTV/TLTV/HTLTV ratio reductions included in the October 17 Guide Bulletin.

Pre-Funding Best Practices in the October 17 Guide Bulletin:

  • Recommend the use of Home Value Calibrator®, a tool that Freddie Mac uses in its quality control process, or a similar tool, to help assess the likelihood that an appraised value is inflated.

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For additional details on these changes:

© 2009 Freddie Mac

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