Magazine article American Banker

Freddie Mac to Require Higher Down Payments on 5-Year Balloon Loans

Magazine article American Banker

Freddie Mac to Require Higher Down Payments on 5-Year Balloon Loans

Article excerpt

WASHINGTON -- Freddie Mac, worried about declining credit quality, has tightened its rules on balloon mortgages. It also clamped down further on adjustable-rate loans.

Adjusting the Adjustables

Freddie Mac is changing its rules on some ARMs:

* It has doubled its down payment requirement to 20% from 10% on five-year balloons.

* It is requiring borrowers to qualify at the second-year rate under some circumstances.

* It is cutting the maximum loan to value on cash-out refis to 70% from 75%.

The agency has announced that five-year balloon mortgages it buys must have a minimum loan-to-value ratio of 80% instead of 90%. For the borrower, this doubles the down payment requirement to 20% from 10%.

The principal on a five-year balloon mortgage must be repaid in a lump sum in five years, so borrowers typically roll over the outstanding amount into another kind of loan. Balloons usually carry the option to convert to an adjustable rate.

But in a Nov. 30 letter to lenders, Freddie Mac said it has found that such loans were particularly susceptible to regional economic downturns. "This weaker delinquency performance may be compounded in markets where property values may not support a refinance and borrowers may not be able to afford the reset terms," the letter said.

Previously, Freddie -- formally the Federal Home Loan Mortgage Corp. -- increased the mortgage insurance requirements on loans with low down payments as loan-to-value ratios on its loans dropped sharply. The Federal National Mortgage Association, or Fannie Mae, followed with tighter insurance rules of its own. …

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