Tuesday, February 27, 2007

Tightening Credit Standards

Speaking of tightening credit standards...
Freddie Mac to Tighten Subprime Rules

Freddie Mac will stop buying subprime mortgages with "a high likelihood of excessive payment shock and possible foreclosure" as part of new investment requirements that will be implemented on Sept. 1, the company announced.

The government-chartered loan clearinghouse said it will only buy subprime adjustable-rate mortgages, and mortgage-related securities backed by those loans, that qualify borrowers at the fully-indexed and fully-amortizing rate. Freddie said, "The goal is to protect future borrowers from the payment shock that could occur when their adjustable-rate mortgages increase."

"Some of these products that worked in the past don't work going forward," Chairman and Chief Executive Richard F. Syron said in an interview with CNBC.
As I discussed yesterday, while this phenomenon can indeed help push the housing market further down, the bigger danger to the US economy is that credit standards may soon be tightened more generally, not just to home-buyers, leading to a fall in lending and investment across the economy.

More and more often when I read the business news these days, I feel like I'm back in the year 1990. It all seems very familiar, and it doesn't cheer me up that it's also utterly unsurprising.

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