Freddie Mac, the second largest purchaser of U.S. residential mortgages, said on Friday that it would stop buying and securitizing all interest-only mortgages because of the poor performance of those loans.
Interest-only mortgages, or IOs, including Freddie Mac's Initial Interest mortgages, provide only interest payments for a specified period starting with the first monthly payment, and then principal and interest for the rest of the loan term.
In its fourth quarter results this week, Freddie Mac said the unpaid principal balance of IO loans was almost $130 billion at the end of December, or 7 percent of its total portfolio.
Nearly 18 percent of those loans were seriously delinquent, meaning at least 90 days late.
"This change is another step in our efforts to refine our mortgage credit and purchase requirements to promote responsible lending and sustainable homeownership," Freddie Mac spokesman Michael Cosgrove said.
About 14 percent of the loans had credit enhancements, according to the company. The average unpaid principal balance per loan was $254,601, Freddie Mac said.
"Our decision to stop purchasing all interest-only type mortgages — through all flow and bulk purchase paths — and to retire our Initial Interest fixed-rate and adjustable-rate mortgage products in the coming months is a result of continuing poor performance of these products in aggregate," Cosgrove said.
Freddie Mac said it would end its IO purchase and securitization activity on or about Sept. 1.
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