Important changes to Freddie Mac purchases of nontraditional mortgages

As directed by our regulator, the Office of Federal Housing Enterprise Oversight (OFHEO), we recently announced changes to our requirements for the purchase of nontraditional mortgages consistent with the practices referenced in the federal banking agencies' Interagency Guidance on Nontraditional Mortgage Product Risks (Guidance).

The changes, announced through our July 13 Single Family Seller/Servicer Guide (Guide) Bulletin [PDF 183K], affect the following mortgages that we collectively refer to as nontraditional mortgages:

• Initial Interest^SM Mortgages;
• Other ARMs and fixed-rate mortgages that have an interest-only feature;
• ARMs with the potential for negative amortization (such as payment option ARMs that we purchase on a limited, negotiated basis)

The changes will be effective for all nontraditional mortgages that have loan application dates on or after September 13, 2007.

Basis for making these changes

In October 2006, regulators of federal financial institutions issued the Guidance to address risks associated with mortgage products that allow borrowers to defer payment of principal or interest and/or that could result in negative amortization.

We share the views of OFHEO and the financial institution regulatory agencies that, because these nontraditional mortgages are complex and entail the possibility of payment shock, it is important that:

• Underwriting standards for these mortgages are consistent with prudent lending practices.
• Prospective borrowers have clear and balanced information prior to choosing a mortgage product.
• Borrower repayment capacity is adequately assessed when underwriting mortgages that have the potential for payment shock.
  

The principles expressed in the Guidance, and the changes in requirements that we announced in our July 13 Guide Bulletin, address these concerns.

For detailed information

We encourage you to review our July 13 Guide Bulletin [PDF 183K] and our Single-Family Advisory E-mail for complete details regarding the changes we announced, including:

• New prescriptive, risk-based standards for originating these nontraditional mortgages that are consistent with the principles of the Guidance
• Negotiated terms of business for nontraditional products covered by the Guidance
• Effective dates and implementation timeframes
• Additional information for federally or state-regulated Sellers
• Loan Prospector changes. Also refer to our article on Loan Prospector changes in this issue of Single-Family News
• Bulk purchase transactions

As always, we encourage you to call your Freddie Mac Account Manager or (800) FREDDIE should you need additional information.