On August 12, Freddie Mac announced via a bulletin on its website that, beginning September 1, it will stop purchasing mortgage loans in New York that fall within the state's definition of “subprime home loans” in a subprime lending reform bill. On August 5, New York Governor David A. Paterson signed the bill into law and said it will help protect New York homeowners from losing their homes and mandates reforms to avoid a similar housing crisis in New York State in the future.
Under the new law, investors, including loan buyers like Freddie Mac and Fannie Mae, are held accountable for mortgage fraud, which Freddie Mac says it has no way of policing or preventing. The bill establishes a borrower ability-to-pay standard that is determined based on lenders' “reasonable and good faith determination.” It also lays out requirements for brokers to act in borrowers' best interests, and mandates all local mortgage servicers to register with the state's banking department.
One of the reforms outlined by the new legislation is the classification of mortgage fraud as a crime under the state's penal code, making it easier for prosecutors to pursue criminal cases and convictions. According to the Governor's office, as the magnitude of the fraud increases, so would the criminal penalty. The provisions are intended to establish strong consumer protections for subprime loans and to implement minimum underwriting standards that protect borrowers.