According to an October 17th article in the Wall Street Journal, government-sponsored enterprises Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC), their regulators and major mortgage lenders are close to a deal that would significantly expand mortgage credit while giving lenders additional protection from charges of making bad loans, according to WSJ sources familiar with the matter.
The current mortgage lending crisis came about because mortgage lenders are enforcing very tight lending standards. Fannie Mae and Freddie Mac have taken in tens of billions of dollars in penalties from lenders over the last few years regarding claims of fraud relating to the underwriting on loans they sold to the mortgage giants. Lenders have blamed the penalties for prompting them to make loans only to borrowers with excellent credit. If this deal between the GSEs and lenders is completed, lender should be more willing to lend to borrowers with lower credit scores and to accept smaller down payments.
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More on the proposed Fannie Mae, Freddie Mac deal
The deal between Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) and mortgage lenders, which could be announced as soon as next week, could help pave the way for greater loan access for millions of Americans who have less-than-pristine credit or can’t afford to put a large amount of money down. At the same time, they could provide kindling for critics who worry that the companies and regulators could repeat some of the mistakes that lead to the housing boom and bust.
The WSJ sources also noted Fannie Mae and Freddie Mac are considering new programs that would make it easier for lenders to offer mortgages with down payments of as little as 3% for some borrowers, according to people familiar the matter, marking a reversal for the loan giants.
The agreement and low-down-payment programs would be the latest effort by federal regulators to ease mortgage standards, which have remained abnormally tight since the financial crisis.
FHFA efforts to work with mortgage lenders
The Federal Housing Finance Agency, which regulates Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC), has been trying to shrink the major role of the GSEs in the mortgage market for several years. Under new director Mel Watt, who took office 10 months ago, the agency has decided to expand mortgage access to ensure tight credit doesn’t damage the housing recovery.
The FHFA has made several earlier attempts to ease lenders’ worries. Back in 2013, the agency decided that lenders wouldn’t have to buy back most loans where the borrower didn’t miss any payments for three years. In May of this year, the FHFA said that borrowers could miss two nonconsecutive payments within three years.
The FHFA exempted certain mistakes such as fraud, and without clear definitions of exactly which mistakes were exempted threshold, lenders said they remained wary to expand mortgage access.
The sources say the new deal will clarify what mistakes constitute fraud, thus giving bankers greater confidence that they won’t be penalized for issues out of their control years after a loan is made.