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.