Freddie Mac Will No Longer Invest In Subprime Mortgages With Prepayment Penalty Terms Greater Than Three Years
March 4, 2002
New Measures Build On Freddie Mac's Leadership in Fostering Responsible Lending Practices
McLean, VA - As part of its ongoing effort to bring a higher level of consumer confidence and market leadership with subprime mortgage lending, Freddie Mac will no longer invest in subprime mortgages with prepayment penalty terms that exceed three years, effective for all subprime mortgages originated on or after October 1, 2002. The announcement was made at the annual conference of the National Community Reinvestment Coalition in Washington, D.C. on February 28.
Freddie Mac is the first secondary mortgage investor to adopt such a stance on subprime prepayment penalty mortgages. Today's announcement furthers Freddie Mac's ongoing commitment to provide lower cost mortgage alternatives for borrowers in the subprime segment of the mortgage market. The change also aligns Freddie Mac's subprime investment standards with the time it takes most borrowers to resolve credit issues.
"Freddie Mac is committed to helping families build wealth through homeownership. Our analysis shows that subprime borrowers with prepayment penalty mortgages typically save as much as half of a percentage point on their mortgage rate," said Bob Tsien, Chief Credit Officer, Freddie Mac. "However, we recognize that the potential for abuse increases the longer the penalty is in effect. That's why we will no longer purchase subprime mortgages with excessively long prepayment penalties originated after October 1, 2002."
Freddie Mac is timing its subprime investment changes to coincide with the October 1 effective date of the lower interest rate "triggers" for disclosures on high cost loans covered by the Home Ownership and Equity Protection Act (HOEPA) announced last year by the Federal Reserve Board. Freddie Mac reiterated its support for the Federal Reserve Board's proposal to lower the interest rate threshold by being one of the few financial institutions to comment on the proposal. Freddie Mac's comments can be found at (www.freddiemac.com/singlefamily/pdf/hoepacomment_030901.pdf.)
Freddie Mac has also determined that many borrowers lack adequate information about prepayment penalty mortgages. To help borrowers make more informed choices about subprime mortgage products, Freddie Mac has created a consumer information guide on prepayment penalty mortgages that can be found at www.freddiemac.com/singlefamily/pdf/ppm.pdf.
The prepayment penalty mortgage information guide continues Freddie Mac's long-standing effort to help borrowers make wise financial choices through consumer credit education and anti-predatory lending initiatives like CreditSmartsm and Don't Borrow Trouble. (For more information on both initiatives, see www.freddiemac.com/creditsmart and www.dontborrowtrouble.com.)
As part of its anti-predatory lending campaign, Freddie Mac will not purchase mortgages with upfront, single-premium credit life insurance, or mortgages from lenders who fail to provide borrowers with the opportunity to chose alternatives to prepayment penalty mortgages, do not comply with the company's high business standards, or do not report full-file credit data to credit repositories each month so borrowers can turn their good payment histories into lower-cost mortgages.
Source: Freddie Mac