Freddie Mac has announced that it will upgrade its automated underwriting system to help lenders evaluate lower-quality loans.
The changes to its automated underwriting service, called Loan Prospector, are designed to help lenders streamline originations-and approve more borrowers for Freddie Mac loans.
Freddie will also provide more specific information about risk classification to lenders who use the system. The company said it will improve feedback messages to increase underwriting efficiency.
Some lenders are upbeat about what the program will do to the subprime business.
"I think there are number of abuses taking place in the subprime market," said Warren Carr, president of Homestead USA, formerly Homestead Mortgage, in Southfield, Mich. He said Freddie Mac will "professionalize the subprime mortgage origination business."
Homestead expects to make $1.2 billion of loans this year. About $1.1 billion are A-rated loans, which qualify for sale to Freddie Mac and Fannie Mae, and the FHA and VA programs.
Most of the rest are in the A-minus category, which would qualify under the new program, Mr. Carr said. Freddie Mac's presence in the subprime sector will also bring "greater credibility to the pricing" for such loans, Mr. Carr said.
Lenders now receive one of three messages from Freddie's underwriting program: "accept," "refer," or "caution." There will soon be two classifications: "accept" or "caution." An "accept" provides lenders with the assurance that the loan will be purchased by Freddie.
Freddie's upgrade "should dramatically streamline" origination of A- minus loans, said Bob Ryan, vice president for marketing and pricing at Freddie Mac. This will provide a critical advantage in times of high volume, as in 1998, he added.
Freddie Mac said that after the upgrade its automated underwriting program will accept 25% more loans. With the increase, Freddie's program will accept 90% of loans, including A-minus loans. With some loans that were once in the "caution" category now having an "accept" rating, lenders can avoid manual underwriting, resulting in a more streamlined process, the company said.
Less-than-prime loans will be priced according to the risk, accounting for loan-to-value ratios, the company said.
Freddie said that these changes are part of an effort to offer more purchase options and a lower cost of funding for borrowers with low and moderate incomes.
The feedback that lenders receive will include message labels to help them match part of a borrower's application with underwriting guidelines, the company said.
Freddie said the new product will be available on Nov. 8, but customers will have to amend their contracts with the company to use its A-minus and Alternative-A services.
