The U.S. overseer of Fannie Mae and Freddie Mac, seeking to reduce the threat that banks will have to buy back flawed mortgages from the two firms, laid out new rules designed to spur lending and ease the housing crunch.
The changes will apply to future loans, not those that are the subject of current bank complaints that the taxpayer-owned companies are being too aggressive in forcing them to buy back loans made at the height of the housing bubble, the Federal Housing Finance Agency said today in a statement.
The new system, which takes effect on Jan. 1, should give banks more certainty about future costs by flagging potentially faulty mortgages earlier, FHFA said. Fannie Mae and Freddie Mac will use data collected on the loans they buy to spot potential defects, and will review samples within three months of purchase instead of waiting until borrowers default.
“Lenders want more certainly about their risk exposure, and the enterprises want to ensure the quality of the loans,” Edward J. DeMarco, FHFA’s acting director, said yesterday in a North Carolina speech where he outlined the changes.
Regulators including FHFA and the Federal Reserve have said that banks are shutting out otherwise eligible borrowers and demanding higher credit scores than necessary because they are afraid Fannie Mae and Freddie Mac will force them to buy back the loans if they become delinquent.
The two companies provide liquidity to the mortgage market by buying loans from originators and packaging them into securities on which they guarantee payments of principal and interest. They also buy some mortgages to hold on their books.
Under the new rules, Fannie Mae and Freddie Mac won’t force lenders to repurchase defaulted loans if borrowers have made 36 months of consecutive on-time payments. Banks will be protected from buyback requests after only 12 months of payments for certain types of loans, such as those originated under the federal government’s Home Affordable Refinance Program, DeMarco said in the Raleigh, North Carolina, speech.
“Ultimately, better quality loan originations and underwriting, along with consistent quality control, will help maintain liquidity in the mortgage market,” he said.
While the changes are a “step in the right direction,” lenders could see more audits in the near future as the system ramps up, said Tim Rood, managing director of the Collingwood Group LLC, a Washington-based consulting firm.