Millions of low-income Americans will be barred from buying homes as the two biggest mortgage backers in the US – which together finance 40 per cent of all home loans – prepare to crack down on lax lending practices.

Freddie Mac (Federal Home Loan and Mortgage Corporation) and Fannie Mae (Federal National Mortgage Association), the government-sponsored secondary mortgage companies, are poised to tighten the lending criteria that they require on the home loans they buy, after several years of unprecedented lending by banks to so-called sub-prime borrowers led to a surge in late payments. Secondary mortgage companies buy home loans from the banks, which they pay for by packaging them into bonds backed by their repayments and selling them to hedge funds and financial institutions.

Freddie Mac, which has financed one in six American homes, said yesterday that it would stop buying sub-prime mortgages that have a “high likelihood” of borrowers not being able to meet repayments.

It will also require the mortgage “orginators” to scrutinise the borrowers’ ability to make repayments over the entire life of so-called adjustable-rate mortgages, which typically increase their interest rates after lower initial payments. Freddie Mac added that it no longer would purchase “no income, no asset” documentation loans after Credit Suisse reported that more than 40 per cent of sub-prime borrowers last year were not required to produce pay documents or any other proof of income and assets.

Richard Syron, the chairman and chief executive of Freddie Mac, said: “Freddie Mac has long played a leading role in combatting predatory lending and putting families into homes they can afford and keep. The steps we are taking today will provide more protection to consumers and enhance the level of underwriting standards in the market.”

Fannie Mae, an even bigger lender than Freddie Mac, is also preparing stricter criteria but said that it would not finalise the details until it had received further guidance from its regulator, the Office of Federal Housing Enterprise Oversight.

The sub-prime mortgage clampdown comes as home repossessions are set to hit their highest level in decades, potentially making millions homeless.

One in five mortgages taken out by high-risk borrowers in the US in 2005 and 2006 will end in repossession, “exceeding the worst foreclosure experience in the modern mortgage market, which occurred during the ‘oil patch’ disaster of the 1980s”, according to the Centre for Responsible Lending.

Mac and Mae

— Fannie Mae and Freddie Mac were established by Congress in 1938 and 1970 respectively, to help people to buy their own homes.

— Each has since floated on the stock market, but their charter and defined mission still come from government. Between them, Fannie Mae and Freddie Mac have financed 40 per cent of America’s $10,500 billion residential mortgage market.

— After the government, the two companies are America’s biggest borrowers. They borrow from the bond market, by packaging the mortgages they buy into fixed-income products backed by interest payments from the home loans.

— The two are clamping down on sub-prime mortgages at a time when one in five of the sub-prime mortgages issued in 2005 and 2006 are expected to end in foreclosure.

Source: Freddie Mac, Fannie Mae, Inside Mortgage Finance, Centre for Responsible Lending

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