Regulation

A U-Turn On the Path to Fannie and Freddie's Future


More than four months after being sworn in as the country’s top housing regulator, Federal Housing Finance Agency Director Mel Watt today gave the first public indication as to how he views the futures of Fannie Mae (FNMA) and Freddie Mac (FMCC), the mortgage giants he oversees. In a break with predecessor Edward DeMarco, Watt seems to be placing more emphasis on creating a robust mortgage market and less on reducing Fannie and Freddie’s role in home lending.

Mortgages are still hard to get for people who lack great credit, in part because many lenders apply even stricter underwriting standards than do Fannie and Freddie. Lenders are being extra-careful to avoid being forced to buy back loans that could sour down the line. This means that some borrowers Fannie and Freddie consider good risks still can’t get loans.

To address lender concerns, Watt is loosening the rules that Fannie and Freddie use to force the buybacks. For example, a lender will no longer be on the hook for a mortgage after three years if the borrower hasn’t been late on more than two monthly payments during that time. The Mortgage Bankers Association praised the move, saying it “should help ease some of those concerns by providing a clearer roadmap.”

DeMarco had proposed reducing the size of mortgages Fannie and Freddie would guarantee on the theory that without being able to rely on Fannie and Freddie’s backstop, the private sector would need to take more risks on its own.

Watt says he is withdrawing that proposal because of “concerns about how such a reduction could adversely impact the health of the current housing finance market.” In essence, he is worried that without Fannie and Freddie, even more people would be locked out of the mortgage market. For now, he says, propping up the market is more important that reducing the government’s role in housing.

Weise_190
Weise is a reporter for Bloomberg Businessweek in New York. Follow her on Twitter @kyweise.

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Companies Mentioned

  • FNMA
    (Federal National Mortgage Association)
    • $3.86 USD
    • -0.01
    • -0.26%
  • FMCC
    (Federal Home Loan Mortgage Corp)
    • $3.81 USD
    • -0.01
    • -0.26%
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