Freddie Mac's subprime initiatives update

Hardly a day goes by without another headline regarding challenges in the subprime market. The debates about what and who caused the problems will go on long after the problems have been addressed. What we know for sure is that the combination of subprime products with risk layering and a weak house price environment has produced a significant rise in the risk of borrower foreclosures and investor losses. And these are the problems that need to be addressed.

Tightening our subprime lending standards

Earlier this year, Freddie Mac announced we are tightening the underwriting standards we require for short-term hybrid ARM mortgages that back the bonds in our investment portfolio. Specifically, we announced we are:

Changing the qualifying standards to be based on fully indexed and fully amortizing rates
Eliminating the use of no income, no asset documentation processes in subprime mortgages and significantly limiting the use of stated income processes

In addition, we committed to work with lenders to develop subprime products and underwriting processes that were more consumer-friendly. In Congressional testimony in April, we committed $20 billion over the next several years to support this effort. We are aggressively working to finalize the details behind our approach, consistent with our tradition of responsible leadership.

Many subprime borrowers may qualify for existing Freddie Mac products

We want to remind you that many borrowers currently in the subprime market might qualify for our existing offerings. In the last few years, we've greatly expanded the breadth and depth of Freddie Mac's set of offerings, most notably our Home Possible® Mortgages that continue to offer stable home financing options for low- and moderate-income borrowers. In addition to Home Possible, many offerings available through Loan Prospector®, including options for borrowers with past credit challenges, may offer opportunities for certain subprime borrowers.

Our goal is that every borrower is put into the best product for which they qualify. Two cautionary notes are appropriate. First, in light of recent regulatory guidance, we are reviewing all of our offerings to assess alignment with this guidance. Second, given the current market environment, we are reviewing the performance and returns in all of our offerings and may consider changes in the future to reflect the current environment.

Developing more consumer-friendly subprime products

We are currently finalizing our new subprime fixed-rate and ARM mortgages. We expect to offer:

Both 30-year and 40-year fixed-rate mortgages
Subprime ARMs that will have longer fixed-rate terms, reduced adjustable-rate margins, and that will be underwritten at the fully indexed and fully amortizing rate
Except in limited cases, mortgages where income and assets will be fully documented
A bulk sale path option using an all-in bid

Initially, this offering will be limited to owner-occupied homes. All of this is to enhance our understanding of a borrower's capacity to repay the mortgage and to reduce the payment shock that subprime borrowers face at reset. Both of these issues are part of the source of today's problems.

New products available initially through limited group

These new subprime products will be available initially as negotiated terms of business through a very limited group of lenders with whom we are already engaged. At this time, we expect to be ready to take delivery on our new offerings in mid summer. While we are anxious to offer these mortgages to a broader set of our customers, we recognize that these are somewhat untested waters for us. We intend to act prudently to ensure that the offerings we develop will work to address the problem and not be the source of future issues. We intend to monitor these products before considering future expansion to additional lenders.

Preserving the dream of homeownership

Finally, we remain committed to working with you and the industry to develop solutions to increase the likelihood of a successful homeownership experience. To this end, we are committed to:

A substantial, ongoing investment in homebuyer education initiatives with lenders and other industry participants that continues to generate positive results in helping borrowers make good mortgage choices. Our Don't Borrow Trouble® anti-predatory lending consumer awareness campaign and our multilingual credit education initiative, CreditSmart®, have reached hundreds of thousands of consumers through our lender customers, credit counselors, and consumer-based organizations.
Servicing requirements for loan modifications, forbearance, and other options that offer possible solutions for many borrowers having difficulty making their current mortgage payments. Freddie Mac servicers assist over 40,000 borrowers with prime mortgages each year with workout options that help these borrowers keep their homes.
Ongoing work with servicers of Freddie Mac-owned mortgages on early, high-touch contact with borrowers in danger of foreclosure, while developing broad-based consumer awareness initiatives that promote options to avoid foreclosure. Our sponsorship of consumer-based avoiding foreclosure public service announcements with NeighborWorks® America, the Homeownership Preservation Foundation and the Ad Council, set to launch this summer, further reinforces our ongoing commitment to help borrowers avoid foreclosure.

For more information

We've received numerous inquiries and comments from our customers since our announcements, and appreciate your support and the fact that so many of you share our concerns regarding current market conditions. We will keep you updated as new information is available.

Call your Freddie Mac Account Manager or (800) FREDDIE for your questions
Read more on Freddie Mac and the subprime market
Visit Don't Borrow Trouble® and CreditSmart® to learn more about these valuable educational resources