WASHINGTON — Freddie Mac plans to tighten its underwriting standards, ending its purchases of "stated income" mortgages and paring back on some other types of risky loans.
The company outlined the changes, which will take effect on February 2, 2009, in an email to clients Friday.
The moves will take the mortgage giant broadly out of the subprime market, sending more business to the Federal Housing Administration, Karen Petrou of the consulting firm Federal Financial Analytics said.
Freddie Mac will cease all purchases of stated income loans, which don't require borrowers to verify their earnings. It will toughen underwriting standards for most so-called Alt-A loans, a cause of the company's financial troubles.
The company will also impose a maximum 45% debt-to-income ratio for nearly all mortgages it purchases and introduce new minimum credit scores for substantially all loans.
Borrowers that have gone through foreclosure or used a "short sale" to get out from under a heavy mortgage in recent years will face tougher scrutiny under the new guidelines.
However, Freddie Mac will continue to purchase mortgages financed by a second "piggyback" loan, which allows borrowers to finance more than 80% of their home's value without private mortgage insurance.
The company still has "a ways to go" to reduce the risk of its business, Petrou argued.
Freddie Mac also announced refinements to new upfront fees it is charging lenders. The fees, which Freddie Mac introduced earlier this year, have been blamed for keeping mortgage rates stubbornly high despite the seizure of Freddie and its sibling, Fannie Mae, by the U.S. government last month.