Mortgage Giants Strike Deal to Loosen Credit, Regulator Says

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APFederal Housing Finance Authority Director Mel Watt, in announcing the deal, called it 'a significant step forward.'
By Marcy Gordon

WASHINGTON -- A federal regulator says government-controlled mortgage giants Fannie Mae and Freddie Mac have reached an agreement with major banks that could expand lending. The head of the Federal Housing Finance Agency, which oversees Fannie and Freddie, announced the deal Monday at a conference of the Mortgage Bankers Association in Las Vegas. FHFA Director Mel Watt said the deal clarifies conditions in which banks could be required to buy back mortgages they sell to Fannie and Freddie for misrepresenting the loans' risks.

Watt said the agreement in principle is "a significant step forward" that will help make more mortgage credit available without harming Fannie and Freddie's finances. It's currently hard for banks to know%VIRTUAL-pullquote-An expansion of mortgage credit could help boost the housing market, which has recovered only gradually since the Great Recession.% whether they'll have to buy back loans, Watt said. That can make banks skittish about lending to borrowers with less pristine credit.

An expansion of mortgage credit could help boost the housing market, which has recovered only gradually since the Great Recession. Big banks in recent years have paid billions of dollars in settlements to resolve government claims of misleading Fannie and Freddie about risky home loans and mortgage securities that they sold before the housing market collapsed in 2007.

Watt also said his agency is working with Fannie and Freddie to develop new guidelines that would allow some creditworthy borrowers to make lower down payments than currently required. Details on the guidelines and the new requirements for banks to buy back mortgages will be issued soon, he said.

The FHFA will set a minimum number of loans linked to misrepresentations by the seller banks or inaccurate data that would require them to be repurchased. That means a pattern of problems must be established, Watt said.

Fannie and Freddie own or guarantee about half of all U.S. mortgages, worth about $5 trillion. Along with other federal agencies, they back roughly 90 percent of new mortgages. The two companies don't directly make loans to borrowers. They buy mortgages from lenders, package them as securities, guarantee them against default and sell them to investors. That helps make loans available.

The government rescued Fannie and Freddie at the height of the financial crisis in September 2008 when both veered toward collapse under the weight of losses on risky mortgages. Together they received taxpayer aid totaling $187 billion. The gradual recovery of the housing market has made the companies profitable again, and they have repaid the government loans.
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