By Richard Beales and Saskia Scholtes in New York
Published: February 27 2007 20:23 Last updated: February 27 2007 23:18
The market for home loans made to Americans with patchy credit histories suffered another blow on Tuesday as Freddie Mac, the US government-chartered mortgage finance group, said it would no longer buy several risky types of subprime mortgages.
The move, billed as a way of protecting borrowers from predatory lending practices, follows a sharp sell-off in the subprime mortgage world that threatens to spill over into the broader $8,000bn US mortgage market.
Defaults on home loans to subprime borrowers have spiked in recent months, exposing a loosening of lending standards in the past two years and forcing more than 20 small subprime lenders to close their doors.
Together with losses at big institutions, including HSBC and New Century Financial, this has prompted lenders to impose tighter criteria for risky borrowers. “The steps we are taking today will provide more protection to consumers and enhance the level of underwriting standards in the market,” said Richard Syron, chief executive.
Freddie Mac, which buys mortgages from lenders and guarantees bonds backed by pools of home loans, is traditionally seen – along with Fannie Mae – as a mortgage buyer of last resort.
But the company said that from September it would stop buying “no income, no assets” mortgages, in which borrowers are not asked to provide financial information; “stated income, stated assets” products, for which borrowers’ incomes are not easily verifiable; and certain kinds of mortgages offered with teaser rates.
The move could put further pressure on the battered subprime market. The ABX index tracking the credit risk on subprime mortgage-backed bonds rated BBB- has ballooned from 250 basis points about three months ago to about 1,400bp on Tuesday.
Jeffrey Rosenberg, head of credit strategy research at Bank of America, said that the “erosion” in the ABX had also “bled” into the highly rated AAA version of the index, suggesting investor concerns are broadening.
This indicator of less-risky mortgage credit risk has jumped from about 10bp at the beginning of February to approach 30bp.
Analysts say a tightening of mortgage-lending standards could damp any recovery in the housing market. Mr Rosenberg said: “Even a slight potential for housing-led weakness to grow into larger systemic concerns would lead spreads wider.”
Existing home sales data released on Tuesday suggested slightly stronger activity than expected last month. But the supply of unsold homes held steady at a high 6.6 months.
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