Freddie Mac, one of the country’s mortgage-finance giants in government conservatorship, announced today it will no longer purchase or securitize interest-only mortgage loans as of September 1, 2010. This announcement includes Freddie Mac‘s Initial Interest Fixed-Rate and ARMs (adjustable-rate) mortgage loans. Don’t be surprised when and if Freddie Mac’s sister company, Fannie Mae, makes a similar announcement in the near future.
An interest-only mortgage is a loan that allows borrowers to pay only the interest portion of monthly mortgage payment for a specific term – typically five or 10 years – with the original principal balance remaining unchanged. At the end of the interest-only period, the principal balance is amortized for the remainder of the term of the mortgage loan. When amortized, the principal balance is divided into monthly installments and includes both principal and interest.
Freddie Mac expects to provide additional information soon to its seller/servicers in forthcoming Single-Family Seller/Servicer Guide. Freddie Mac lost nearly $26 billion in 2009, with nearly 25% of the company’s losses resulting from interest-only mortgage loans.
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