On Monday, American Banker reported that affordable-housing advocates were arguing that Freddie Mac and its larger rival, Fannie Mae, should be barred from buying subprime loans on the theory that their purchases could encourage predatory lending.
The McLean, Va., company later asked to give a detailed accounting of its efforts to crack down on predatory lending. That response, in a letter from chief credit officer, David A. Andrukonis, follows:
To the Editor:Freddie Mac wants to help more families become homeowners, even borrowers with less-than-stellar credit. We also want to make the mortgage market safer, especially for borrowers vulnerable to the abusive lending practices that are often linked to the subprime market.
Is this a good idea? We think so. It's also part of our job. Bringing liquidity to the entire spectrum of the mortgage market is embedded in the mission that Congress chartered us to do 30 years ago. But no responsible mortgage investor can help subprime borrowers without first learning more about the subprime mortgage market.
So, in 1997, we began a thorough exploration of the subprime market. We talked with borrowers, and we began working with lenders. To date, we have purchased roughly $10 billion in subprime mortgages, and we have learned a great deal about how to boost affordable homeownership and choke off opportunities for predatory lenders.
For example, in March we announced several anti-predatory actions that were quickly hailed by consumer groups, community activists, and political leaders as the first steps to a fairer and more efficient market for all borrowers.
First, Freddie Mac will not buy subprime mortgages where single-premium credit insurance (life, disability, or unemployment) is financed out of the loan proceeds. This product has clear predatory potential. What's more, anything that strips equity out of a home and increases the likelihood of default is bad news for us as well as for homeowners. (Our ban was applauded by Consumers Union, and North Carolina community activist Martin Eakes called it one of the most important steps taken by any mortgage investor during the past 20 years to protect low-wealth borrowers!)
Second, we won't buy loans that trigger disclosure requirements under the Home Ownership and Equity Protection Act. These are legal loans, but some are potentially predatory. Customers must ensure that the portfolios they sell Freddie Mac don't include high-cost HOEPA loans. If a post-purchase audit shows otherwise, we can make them repurchase the loans.
Third, we hold our lenders to very high standards and won't do business with those who don't meet them. That's why we require both prime and subprime lenders who sell us loans to report full-file credit data to the credit repositories each month. This is critical because it will help subprime borrowers with good payment records move into lower-cost mortgages as their credit improves.
We scrutinize lender business practices before we buy their mortgages, especially lenders originating subprime mortgages. We also perform on-site reviews, check their loan files, and re-check their business practices.
These steps already have - and probably will continue to - cost us some business. Some of the largest subprime players in the market are currently unable to sell us loans because they fail to meet our standards.
Our commitment to this market goes beyond erecting new borrower safeguards. Freddie Mac is also giving borrowers with credit issues more and better mortgage choices. In February, we announced a market rate mortgage to borrowers who successfully participate in a debt-management plan sponsored by local Consumer Credit Counseling Services in 19 initial markets. Over the next few weeks we will roll out a step-down mortgage that reduces rates after borrowers keep their payments current for 24 months.
If we didn't do our jobs and allowed things to remain "business as usual," we would make the nation's predatory lenders happy. But we know this is not in the best interests of the consumers that our industry serves. Bringing the benefits of the conforming market to subprime borrowers is critical to fulfilling our housing mission. And, as we bring more competition, more standardization, and more fairness to key segments of the subprime market, families and neighborhoods will undoubtedly be the big winners.
And there's nothing subprime about that.
David A. Andrukonis,
Chief Credit Officer, Freddie Mac