Starting in September, Freddie Mac will no longer buy or securitize interest-only mortgages, as part of its continuing effort to rein in losses and tighten underwriting.
The decision, announced Friday, seems to be more a formality than anything else. Few of these types of high-risk loans, which were popular during the boom years, are being originated anymore.
And the government-sponsored enterprise has been reducing its purchases of such loans since 2008, according to a Securities and Exchange Commission filing last week.
In fact, none of the interest-only, single-family mortgages in Freddie's portfolio at yearend were made in 2009, according to a recent investor presentation. Most were originated in 2006 and 2007. (Freddie did buy some seasoned interest-only loans last year but they made up less than 1% of its total purchases.)
Walt Schmidt, a senior vice president and manager of structured product strategies at First Horizon National Corp.'s FTN Financial Capital Markets, said even though issuance in the interest-only sector is skimpy he found it interesting that Freddie would formalize this policy.
"I think it's indicative of the fact that they're trying to present a better post-conservatorship face to the market," he said. "So far in 2010, there has been a larger focus on prudential underwriting standards … and balance sheet management."
Freddie spokesman Michael Cosgrove said as much.
"This change is another step in our efforts to refine our mortgage credit and purchase requirements to promote responsible lending and sustainable homeownership," he said.
Interest-only loans, having a total unpaid balance of $129.9 billion, made up 7% of Freddie's single-family mortgage portfolio at yearend, the GSE said. Nearly 18% of these loans were 90 days or more past due.
Combined, interest-only and alternative-A loans constituted 44% of Freddie's credit losses last year, according to the filing.
Interest-only mortgages let borrowers pay only the interest on their loans for a specified period. But because homeowners were saddled with hefty payments once the interest-only period expired, losses on these loans skyrocketed during the housing crisis and were the bane of many lenders' portfolios.