Freddie Mac, a company responsible (along with the other GSE, Fannie Mae) for the sound underwriting standards of conventional, prime mortgages, decided last week to tighten it’s underwriting. This Freddie Mac tightening of underwriting standards is probably too little, too late.

In the wake of the decision to allow the GSEs to underwrite and insure loan outside their area of expertise, “jumbo mortgage” products above $417,000, maybe Freddie Mac came to it’s senses deciding to limit it’s risk.

This isn’t really a “tightening” so much as a return to sane, prudent, conventional, underwriting standards before subprime perverted everything.

What Undewriting Standards Have Changed?

1. If you have a credit score below 740 and don’t have 20% down payment, you’ll be charged a “risk premium” of $300 per $100,000 of loan amount.

Well, that’s hardly punitive…

2. The Freddie Mac 100% program, the Freddie Mac Gold program, is eliminated.
This program should never have been on the books in the first place…

3. Lowered the maximum loan-to-value in risky markets to 95%…not the 97% maximum other areas are eligible for.
Only prudent to limit ones exposure to markets in free-fall, dontchathink!

Don’t Pat Freddie Mac On The Back Just Yet

Wanting to believe Freddie Mac did this out of their own free will, was too much to ask.

On February 6th, MGIC, the largest private mortgage insurer, announced a series of bans they put in place to safeguard their bottom line. Since Freddie Mac needs the insurance MGIC and others private mortgage insurers issue to pool and sell their loans, Freddie Mac’s hands were tied.

MGIC listed the following high risk areas where those changes above go into effect on March 3.

The states are:

All of Arizona, California, Florida and Nevada

The metropolitan areas are:

Atlanta, Baltimore, Boston, Chicago, Denver, Detroit, Minneapolis, the Long Island and New Jersey suburbs of New York, Portland, Ore., Tacoma, Washington, the Maryland and Northern Virginia suburbs of Washington, D.C., and Washington D.C.

The types of loans MGIC will no longer insure in these areas are:

cash-out refinances
reduced-documentation loans
5 percent or less down payment loans
rental house and other investor loans
Payment Option or Pick-a-Payment Loans since they have negative amortizations.

This will exacerbate the credit crunch initially, but remember it’s the lax guidelines that put us in this mess to begin with…so this is the distasteful medicine we must all swallow.

Our housing and secondary mortgage market depend on us getting back to sensible underwriting standards, washing away with foreclosure all those folks who should have never been given a loan in the first place, and returning the market to price levels the average middle class American can afford.

The sooner the better…

Good Luck!

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