Freddie Mac To Eliminate Interest Only Mortgages

Freddie Mac has announced that effective September 1, 2010 they will no longer purchase interest only mortgages. Undoubtedly lenders will will eliminate these mortgages from their product lines well in advance of the September deadline.

Currently interest only loans account for just over 7% of Freddie's portfolio. According to the release it is not the quality of the underlying borrowers that is at issue (the average credit score for IO borrowers in 2008-2009 was 720). Freddie Mac and Federal Housing Finance Agency feel that underlying weakness in the job market and the overall health of the housing industry that have led them to withdraw this option from their product line.

This is just the latest, in the trend to homogenize mortgage products. It would not surprise me at all to see even more products eliminated from both the Fannie Mae and Freddie Mac offerings as Federal Housing Finance Agency tightens their grip on the two GSE's. It is entirely possible that elimination of certain products will have a wholly negative impact on certain housing markets.

What remains to be seen, is when private equity will step in to fill the void left by Fannie and Freddie. Nature and the economy despise a vacuum. Foresee a company along the lines of the old Headlands Mortgage Group popping up to fill the gap. For those who do not remember Headlands, when I started as a mortgage broker they were practically the only game in town for a client that needed a "stated" income loan (stated income is where the client indicates what he earns on the mortgage application, but the lender does not verify it). Stated loans have taken a bad wrap both on Capital Hill and in the media as a cause for the current housing crisis. Unlike the stated loans offered over the last few years, Headlands had a make sense approach.

1. They made sure you had some "skin" in the game. A typical required down payment was 20%-25%.
2. You had to be self employed (figuring that a good accountant can make a self employed person look "bad" on paper by running expenses through the business)
3. You had to have verifiable assets! Typically Headlands wanted to see at least 6 months of your stated income in a bank account or other liquid asset
4. You needed EXCELLENT credit
5. They watched out for payment shock also
6. They wanted a REAL appraisal, sometimes a review appraisal too

This is a far cry from the types of stated loan that were being dished out by the banks over the last few years. I can actually remember Fannie Mae doing a deal that was stated income, stated asset, and did not even want an appraisal. That is a recipe for disaster.