Freddie Mac Moves to Contain Subprime Fallout

Facing shaken financial markets over growing subprime lender bankruptcies and warnings, big bank (HSBC, New Century) reports of record subprime losses and Congressional hearings into predatory subprime lending, government-backed mortgage buyer/lender Freddie Mac announced Tuesday that effective Sept. 1, it would no longer buy subprime mortgages with excessive payment resets or high default probability. Freddie Mac will now require stricter salary documentation and repayment capability proof, and will only buy teaser rate loans where borrowers qualify for the higher reset rate. The firm is developing alternative subprime loans with longer fixed-rate terms, and is also encouraging prime loan practices by setting up escrow accounts for borrowers tax and insurance payments. The ABX index tracking BBB- subprime mortgage-backed bonds has risen 250% since November, to 1,400 basis points.

Proposed escrow legislation worries banks

State-chartered banks are worried that proposed legislation requiring them to pay interest on escrow accounts would unfairly change Alaska's mortgage marketplace, while the legislator who crafted the bill said it would give millions back to Alaska homeowners.

House Bill 33, by Rep. Jay Ramras, a Fairbanks Republican, would require "covered institutions" to pay interest on reserve or escrow accounts created to pay property taxes, insurance and other payments related to mortgage loans.

However only four banks in the state would have to implement the conditions of the bill, because the state cannot regulate the 12 credit unions or the five federally chartered banks with Alaska branches.

That leaves Mt. McKinley Bank and Denali State Bank, based in Fairbanks; Northrim Bank of Anchorage; and First Bank, based in Ketchikan.