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Is Subprime Finished In New York State?

by Peter G. Miller
August 18th, 2008

If you want to increase the use of FHA mortgages here’s the way to do it: Freddie Mac has announced that it will stop buying subprime loans in New York state after September 1st.

The reason? A new law which could make mortgage investors liable if a loan has been improperly originated in the state.

“The State of New York,” says the company, “has enacted legislation that creates a “subprime home loan” category of Mortgages. Freddie Mac will not purchase New York Mortgages with Note Dates on or after September 1, 2008 that fall within the law’s definition of ‘subprime home loans.’

“Accordingly, we will amend Guide Section 22.18 to provide that New York Mortgages with Note Dates on or after September 1, 2008, that are “subprime home loans,” are ineligible for purchase by Freddie Mac. We will also make minor revisions to the references to New York ‘high-cost home loans.’”

The betting here is that Fannie Mae and other secondary loan buyers will join Freddie Mac in the boycott of NY subprimes.

One by-product of the Freddie Mac action is that there will surely be fewer subprime loans in New York state. The result is that buyers with poor credit will effectively be shut out of the marketplace.

A second by-product is this: The demand for FHA mortgages in New York state will likely soar.

Is this good for borrowers? Some subprime borrowers plainly will not qualify for FHA loans. Those who do qualify will get better rates and terms than are typically available in the subprime market — no prepayment penalties, no exploding ARMs, etc.

The New York law, while well-intentioned, seeks to saddle investors with a liability where they have no control over the origination process. In other words, fraud by a loan officer does not mean some investor a thousand miles away knew about it, approved of it, should be responsible — or will be responsible.

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This entry was posted on Monday, August 18th, 2008 at 3:01 am and is filed under . You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.

One Response to “Is Subprime Finished In New York State?”

  1. VA refinance Says:

    thanks for teh info about NY however I am really surprised to hear the there are even lenders out there doing Sub-prime loans, I really didnt think there were any out there. this really does open the door for FHA

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