Help for the subprime loan market

NEW YORK --Fannie Mae and Freddie Mac are riding to the rescue of the subprime lending market.

The two large housing finance agencies are beefing up their business of guaranteeing subprime loans at a time when slack lending standards and falling home prices have translated into rising delinquencies and foreclosures among subprime borrowers.

Their involvement will provide alternatives for borrowers anxious to refinance out of existing mortgages that have or will reset to higher monthly payments.

Fannie Mae and Freddie Mac aren't lenders themselves, but guarantee loans made by those who adhere to the agencies' underwriting guidelines.

Until recently, Fannie Mae was only involved marginally in guaranteeing subprime loans, while Freddie Mac had sidestepped the market altogether. But, the agencies are now stepping into the breach caused by a surge of defaults, foreclosures and subsequent caution that's set in on Wall Street where the bulk of the loans were packaged into tradable securities.

Consumer advocacy groups and politicians -- who two years ago pointed at Fannie Mae and Freddie Mac as potential sources of systemic risk in the mortgage market -- have been calling on the agencies to get more involved in guaranteeing subprime loans and creating consumer-friendly mortgages that can be made available to borrowers with blemished credit histories.

Such borrowers have seen their options reduced as some subprime lenders have shut their doors and many others have tightened lending standards.

The agencies have already begun moving into this lower-credit mortgage market segment.

Fannie Mae has had a program in place -- called "Expanded Approval" -- since 2001, said spokesman Alfred King. Expanded approval loans -- aimed at borrowers with blemished credit histories -- were only offered up until this year by about 500 lenders.

In April, Fannie Mae announced it would expand this program and make it a standard option for all the roughly 2000 lenders who regularly deliver loans for guarantee to Fannie Mae.

The agency also said it would now include 40-year loans as an option in the subprime program to help improve affordability for borrowers.

Unlike some of the subprime lenders who loosened lending standards at the height of the housing boom, Fannie Mae does not allow stated income or stated asset loans in its expanded approval program. The agency also limits loan types to fixed-rate 30-year or 40-year loans as well as loans that carry a fixed rate for five, seven and 10 years and then switch to floating rates, called hybrid adjustable-rate mortgage loans.

The Fannie Mae program was originally designed to provide sounder loan alternatives for borrowers with blemished credit histories who could potentially be unwittingly vulnerable to predatory or high-cost lending.

However, soon after the program was initiated, home prices soared and borrowers looked to other lenders who offered more attractive terms and offered mortgages that would be too large for a Fannie guarantee.

In some cases, these alternate loans allowed borrowers to state their income rather than document it, or allowed the entire purchase price of a home to be financed with a first and second loan and no mortgage insurance. In some cases, these loans offered very low introductory rates that would then adjust upward after a limited time.

Now, however, as more than two dozen lenders to subprime borrowers have shut their doors, there are fewer such exotic options available and Fannie Mae seems poised to gain more business in the subprime sector.

Freddie Mac, meanwhile, has not, up until now, guaranteed subprime loans. This summer, the agency will roll out a program to guarantee subprime loans, said spokesman Michael Cosgrove.

Freddie Mac has committed to buying $20 billion in subprime loans from lenders over the next several years to support those who make loans to borrowers with imperfect credit.

The details of what the underwriting standards will be for these loans are still being hammered out, Cosgrove said.

In mid-May, Freddie Mac Chairman and Chief Executive Richard F. Syron gave a few indications of what the loans will -- or won't -- look like.

He said that they will be fixed-rate as well as hybrid ARM loans that are designed so that borrowers don't suddenly find themselves having to make much higher payments when loans adjust to floating rates.

Freddie Mac "will stay away from the riskier loan products, and those with no documentation," Syron said. "If we handle it right, what's good for our mission will be good for our business as well."