Freddie Mac Evaluating Adjustable Mortgages It Buys, Says Thygerson
Newman, A. Joseph, Jr., American Banker
HERSHEY, Pa. -- Seeking to head off trouble for lenders and borrowers alike, the Federal Home Loan Mortgage Corp. is "looking very aggressively at the design, underwriting, and pricing" of the adjustable-rate mortgages it buys, said Kenneth J. Thygerson, the agency's president, in a speech he recently delivered at the annual meeting of the Federal Home Loan Bank of Pittsburgh.
The thrift industry and Freddie Mac are going to clean up this (ARM) act," Mr. Thygerson said. "And we'd better get started pretty soon."
Mr. Thygerson's speech, as well as his comments during a subsequent interview, underscored a mounting concern over ARMs by federal agencies and industry officials.
Adjustable-rate loans are necessary to insulate mortgage lenders from interest rate risks that have devastated many in the past. But loose underwriting and the "payment shock" of borrowers suddenly faced by unexpected, high rates could create dangerous credit risks.
David Maxwell, Federal National Mortgage Association chairman, announced in late April that his association (which also buys ARM from lenders) will generally stop buying ARMs with initial rates that are more than 2.5 points below market rates.
Mr. Thygerson of Freddie Mac delineated four areas presently being examined by the agency:
* Initial criteria by which lenders qualify a borrower for an ARM, including the ratio of income to monthly payment. (The criteria are now the same for ARMs and fixed-rate loans.)
* Builder and seller buydowns on three-and five-year ARMs. (The agency now bars buydowns on one-year adjustable loans.)
* Limits on increases in monthly payments in any one year. (borrowers currently have the option of paying either the full amount of the increase or 7.5% of it.)
* Caps on payment increases over the life of the loan.
Freddie Mac has always stressed "prudent" mortgage lending, Mr. Thygerson reiterated. But, he added, the industry and the agency must now "do a better job" with ARMs.
"Don't trade off interest-rate risk for credit risk," he urged S&L officials at the meeting here. …