Lenders Refocus on Borrower's Capacity to Pay.(Federal Home Loan Mortgage Corp.)

New York -- With the loosening of underwriting standards in recent years, lenders often made loans without paying enough attention to all of the "three C's" of underwriting, an executive from Freddie Mac said at the MBA National Mortgage Secondary Market Conference last week.

Many of the loans made in recent years were underwritten for the buyer's credit quality and collateral taken into account, but too little attention was paid to their capacity to make payments, said Patricia McClung, a vice president at Freddie Mac.

Toward that end, Freddie Mac - like many of its lender clients - has imposed some new underwriting restrictions going forward. For instance, Freddie Mac will no longer make "no income, no asset" loans going forward. Those low-documentation products, where borrowers are not asked to verify income and assets, were popular at the peak of the market, especially among buyers of investment homes.

She said it is important for lenders to underwrite for principal, interest, taxes and insurance payments that borrowers will have to make when they own a home. Too often, in recent years, loans have been underwritten for "PI" rather than "PITI," she said. Failure to take the tax and insurance burden into account is one reason some borrowers have fallen behind on their payments.

With regard to refinancing borrowers who face onerous rate resets, Ms. McClung said that Freddie Mac's data suggest that many borrowers still have comfortable debt-to-income ratios even if they are facing potentially troublesome rate resets. In that scenario, many can be refinanced into fixed-rate loans, she believes.

And she reiterated that Freddie Mac wants to find ways to serve subprime mortgage borrowers.

"We want to serve the subprime borrower. This is not about turning a subprime borrower into a prime borrower. But we do want to make them a better borrower," she said.