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Freddie Squeezes Subprime

The big mortgage outfit will try to raise standards in the business.

Mortgage lender

Freddie Mac

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will no longer purchase ultrarisky mortgages.

The McLean, Va., government-sponsored mortgage company said Tuesday that beginning in September it will cease buying subprime mortgages that "have a high likelihood of excessive payment shock and possible foreclosure."

At that time, Freddie Mac will only purchase subprime adjustable-rate mortgages and related securities that "qualify borrowers at the fully indexed and fully amortizing rate."

The changes are to protect borrowers from "payment shock that could occur when their adjustable-rate mortgages increase," Freddie Mac says.

The news comes as shockwaves run through the subprime mortgage industry, as rates of defaults rise among borrowers with poor credit histories. Several subprime players including

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have issued grim financial forecasts in recent weeks.

Freddie Mac is developing improved fixed-rate and adjustable-rate mortgage products to provide lenders with more choices to offer subprime borrowers. The company says it plans to commit "significant capital" to purchasing these loans into its portfolio.

The lender is also limiting the use of "low-documentation underwriting" for subprime mortgages and recommending that subprime mortgage lenders collect escrow for borrowers' taxes and insurance payments -- as is typical in the prime sector.

Shares were falling 35 cents to $64.58.