In what shouldn’t come as a shocker to legislators in New York state, but probably does, Freddie Mac has announced that they will no longer purchase subprime mortgages in New York state dated after September 1st, according to the Wall Street Journal. New York passed a law that will go into effect on that date that is meant to curb abusive lending practices, but which could also increase risks for lenders. Freddie Mac saw enough problems with the law that they said enough is enough, and decided they aren’t going to bother with it.
I’ve been saying for some time that many of these laws being passed are ultimately going to hurt the consumer, and this is just the first step. Freddie Mac is the second largest mortgage buyer in the country, and without them in the equation, bottom line lending costs for consumers will go up. Now, we can debate all day whether or not people should even be buying homes if they have to use subprime loans, but that is not the point. If the goal was to eliminate subprime loans, then they just should have done that; by passing legislation such as this, though, they are just going to increase the cost of the loans for those borrowers who do use them.
We will have to wait and see how this ends up affecting the real estate market in New York, but it certainly isn’t going to help it. I don’t know how popular subprime loans are there in the first place, but it is likely that low income areas will be hurt the most. Typically that is where subprime loans are most widely used. Investors who are looking to buy property in these low income areas should look carefully at the borrowing possibilities for potential buyers. If subprimes are out of the question, then you had better make sure that people can get a FHA loan, or that you are offering some sort of owner financing. New York may also not be the last state to take such steps as these, and it is possible that Freddie and possibly even Fannie Mae could take a similar stance to the new rules in the other states.