Under the new standards, Freddie Mac will only buy subprime mortgages where the borrower has been qualified at the higher interest rates to which these loans eventually adjust.
In other words: if the initial rate is 5%, but the loan eventually adjusts to 10%, borrowers must now show the ability to pay the loan at the higher 10% rate for Freddie Mac to buy the loan.
In an exclusive appearance on CNBC, Richard Syron, Chairman and CEO of Freddie Mac, said he was taking the action now because borrowers have been squeezed by higher interest rates and falling housing prices.
"At a time when housing prices were going up 5% a year, and it went up 10% in two years, if someone paid 5% to get a mortgage, they were still ahead," said Syron. "But in the last few months, housing prices have softened."
Iin addition, Freddie Mac will limit the use of low-documentation loans where borrowers cannot verify their income.
The new standards won't take effect until Sept. 1, 2007 because Freddie Mac wanted a transition period.
"We don't want people that have things in the pipeline now or may be in a position that they have to refinance in the very short run to be squeezed out of the market," said Syron.
Freddie Mac has financed about 50 million homes. Syron says the company is developing new, more consumer-friendly subprime products.