U.S. News

Fannie, Freddie Developing New Types of Subprime Loans

The heads of Fannie Mae and Freddie Mac said the mortgage finance giants are developing new types of loans to help distressed borrowers with high-risk mortgages keep their homes at a time of rising foreclosures.

The moves by the two government-sponsored companies, the biggest buyers and guarantors of home mortgages in the country, came in response to the turmoil in the market for so-called subprime mortgages, higher-priced loans for people with tarnished credit or low incomes who are considered greater risks. In recent weeks, the distress has roiled financial markets and stoked anxiety that it could spill over into the broader economy.

The initiatives by the companies were disclosed in testimony prepared for a House hearing by Daniel Mudd, president and chief executive of Fannie Mae , and Richard Syron, Freddie Mac's chairman and CEO.

"We are ... working on a major effort to develop more consumer-friendly subprime products that will provide stable financing alternatives going forward," Syron said in his testimony for the hearing by the House Financial Services Committee. "We plan to have our new offerings in the market by midsummer."

He said the new products will include 30-year and possibly 40-year fixed-rate mortgages as well as adjustable-rate mortgages with longer fixed-rate periods.

Fannie Mae, in a new program called "HomeStay," is offering new options so that lenders can help subprime borrowers refinance out of high-interest adjustable-rate mortgages or other difficult loans, Mudd said. He said the company plans to stretch the term on subprime loans to 40 years from the current maximum 30 years -- which will reduce monthly payments for borrowers by around 5 percent, Mudd said.

Adjustable-rate mortgages are especially prevalent in the subprime market. They are considered higher-risk loans because they typically draw borrowers in with an initial teaser interest rate, which can rise sharply over time.

On Monday, a high-level group of federal officials, bankers and mortgage industry executives met and agreed on a goal of keeping deserving borrowers with high-risk mortgages in their homes, said Sheila Bair, chairman of the Federal Deposit Insurance Corp. Financial institutions making changes to the terms of home loans -- such as extending the initial low, or "teaser" interest rates on adjustable-rate mortgages -- may help ease the distress of borrowers who are making regular payments but facing possible default, Bair said.

There was consensus among the regulators, Wall Street executives, bankers and others attending that "it will be in everyone's interest to keep borrowers in their homes," Bair said in a telephone interview after the seven-hour, closed-door meeting.

"It's going to be a very challenging task. ... We're not going to be able to save everybody," Bair said. But regulators can try to serve as catalysts for financial institutions to make changes, she said.

The meeting at FDIC headquarters and Tuesday's congressional hearing come against a backdrop of mounting pressure on Congress and regulators to do something about rising foreclosures among homeowners unable to meet high payments. Millions of homeowners are said to be at risk of losing their homes in coming years. While a number of politicians, consumer advocates and community activists are clamoring for Congress to act, industry interests and some Republican lawmakers are warning that new restrictions on mortgage lending could choke off credit to those who most need it.

Democrats in power positions on Capitol Hill have started drafting legislation to curb abusive mortgage lending practices that especially target minorities and the elderly, putting people into home loans that they cannot afford to repay.

The home-mortgage business has exploded in the last two decades with big Wall Street investment firms buying loans in bulk from banks and other lenders, and bundling them into securities to be sold to investors, spreading the risk.

Fannie Mae and Freddie Mac were created by Congress to pump money into the home-mortgage market by buying home loans from banks and other lenders and turning them into securities for sale on Wall Street. They have grown dynamically in recent years and now finance or guarantee some $4 trillion of home mortgages, representing about half of the single-family mortgages in the country.