Freddie Mac Joins the Fray with New Option ARM Products.

Washington -- Freddie Mac wants to start purchasing option-adjusted ARMs later this year as it tries to catch up with the market and the Wall Street conduits. These adjustable-rate mortgages offer borrowers several payment options, including interest-only payments, to address different and changing needs. Option ARMs are especially popular on the East and West Coasts and lenders are originating tens of billions of these loans each month, Freddie Mac vice president James Cotton said. "The Street is telling us that's where the ARM market is going," he added.

Fannie Mae has just introduced a 40-year mortgage product, which also helps borrowers to lower their monthly payments and stretch their purchasing power.

Freddie is looking at a 40-year product. But option ARMs are a "higher priority," Mr. Cotton said. The secondary market agency plans to start purchasing option ARMs in bulk by the end of the year. And it wants to start buying loans on a flow basis in 2006.

The Freddie option ARM will allow borrowers to chose from four payment options each time they write a monthly mortgage check.

The first option allows borrowers to make a minimum payment, which creates negative amortization because the payment does not cover principal and interest. A second option is an interest-only payment, while the third and fourth options allow borrowers to chose between a 15-year or 30-year fully amortizing ...