Civil Rights Groups Laud New Mortgage Lending Standards
Feature Story by Tyler Lewis - 2/28/2007
Fair housing advocates are calling new tougher subprime lending standards from Freddie Mac, the nation’s second largest financer of home loans, "a win-win."
Under the new standards, Freddie Mac will no longer buy high-risk subprime home mortgages most vulnerable to foreclosure. The move protects some future borrowers from "payment shock" that could occur when their adjustable rate mortgages increase.
"It takes backbone to make a move like this and Freddie Mac should be commended for its leadership on the issue," said Wade Henderson, president of the Leadership Conference on Civil Rights (LCCR). "By cutting off financial backing for dicey, low interest ‘teaser’ loans that balloon astronomically, Freddie Mac will prevent families, disproportionately minorities, from losing their homes."
"This is a responsible standard that ensures that these borrowers will have the ability to repay their loans, thereby protecting their home equity," said Sen. Christopher Dodd, D. Conn., chairman of the Senate Banking Committee, in a statement.
In addition, Freddie Mac will develop fixed rate and hybrid adjustable-rate mortgage (ARM) products that offer subprime borrowers safer choices when searching for loans. The company will also limit the use of low-documentation underwriting to help ensure that borrowers have the income necessary to afford and keep their homes.
Civil rights groups and fair housing advocates said that Freddie Mac’s decision comes at a time when the number of foreclosures is increasing rapidly. In their December 2006 report on foreclosures, the Center for Responsible Lending (CRL) found that one out of five subprime mortgages originated in the past two years will end in foreclosure, which will cost American families $164 billion dollars.
"With home foreclosures rising in every region of the country, Freddie Mac's action today could not be more timely. As a major investor in subprime home loan securities, Freddie Mac's leadership in establishing risk and ethical standards is extremely important and much appreciated by homeowners and civic leaders all across the nation," said CRL CEO Martin Eakes.
Civil rights groups said that the new standard would help protect minorities that are often the target of predatory lending in the subprime market. According to 2006 CRL data, Latinos and African Americans are over 30 percent more likely to receive higher-rate subprime mortgage loans than identically situated white borrowers.
"Our communities have the most to gain from homeownership, but we also lose the most when lenders aggressively steer families into unaffordable loans," said Hilary Shelton, NAACP Washington Bureau director. "We commend Freddie Mac for eliminating incentives to make loans that push families back instead of moving them forward."
"We genuinely hope Fannie Mae and other players in the mortgage market follow Freddie Mac’s lead and adopt similar practices that are aimed at producing more responsible, repayable home loans."
The new standard goes into effect in September.
