Fannie and Freddie to give homeowners more credit

Fannie Mae and Freddie Mac are going to get bigger. In a reversal, the government side the two mortgage lenders were going to extend more credit to homeowners instead of getting smaller.

The Wall Street Journal story by Nick Timiraos and Deborah Solomon had these details:

The Obama administration and federal regulators are reversing course on some of the biggest postcrisis efforts to tighten mortgage-lending standards amid concern they could snuff out the fledgling housing rebound and dent the economic recovery.

On Tuesday, Mel Watt, the newly installed overseer of Fannie Mae and Freddie Mac, said the mortgage giants should direct their focus toward making more credit available to homeowners, a U-turn from previous directives to pull back from the mortgage market.

In coming weeks, six agencies, including Mr. Watt’s, are expected to finalize new rules for mortgages that are packaged into securities by private investors. Those rules largely abandon earlier proposals requiring larger down payments on mortgages in certain types of mortgage-backed securities.

The steps mark a sharp shift from just a few years ago, when Washington, scarred by the 2008 crisis, pushed to restrict the flow of easy money that fueled the housing bubble and its subsequent bust. Critics of the move to loosen the reins now, including some economists and lenders, worry that regulators could be opening the way for another boom and bust.

Annie Lowrey pointed out in a story in the New York Times that many people want private investors to take more of the risk in the mortgage market:

Many Republicans and some Democrats have forcefully argued that Fannie Mae and Freddie Mac, which sustained huge losses when the housing market collapsed and required a costly government bailout, should step back to encourage the private market to assume more of the risk of financing housing.

Mr. Watt laid out several specific measures. For example, rather than reducing current limits on the size of the loans they guarantee, as previously proposed by the former overseer, Fannie and Freddie would keep the current, relatively loose, limits in place. The two enterprises back about two-thirds of all new mortgages.

“This decision,” Mr. Watt said, “is motivated by concerns about how such a reduction could adversely impact the health of the current housing finance market.”

The new director also loosened rules that obligated banks to buy back distressed loans. Mr. Watt said that the mortgage financiers would now allow two delinquent payments in the first 36 months after their acquisition of a loan, and that they would eliminate “automatic repurchases when a loan’s primary mortgage insurance is rescinded.”

Jim Puzzanghera wrote for the Los Angeles Times that Watt is taking the agency in a new direction after taking over from its former head:

Watt, a former Democratic congressman, has shifted course at the agency since taking over following a rough Senate confirmation battle. Watt replaced Edward J. DeMarco, a career bureaucrat appointed by President George W. Bush.

DeMarco had served as the agency’s acting director since 2009. He rejected requests by President Obama and Democrats to force Fannie and Freddie to take more aggressive steps to help homeowners facing foreclosure, particularly writing down principal on mortgages.

Most Republicans said DeMarco was protecting taxpayer money pumped into the companies, and they opposed Watt’s nomination.

Watt said Tuesday that the agency was studying principal reductions but decided there were other issues to focus on first.

“It doesn’t mean we are not considering it,” he said. “It just means we’re not ready to talk about it at this point.

The agency soon will seek public comment on the fee increases, which were set to take effect this spring, Watt said. The agency had estimated that the fees for a 30-year fixed-rate mortgage would have increased by 0.14 percentage point.

Clea Benson wrote for Bloomberg that banks will have to buy back fewer loans under the new loans:

Watt also announced he was loosening rules that have forced banks to buy back billions of dollars’ worth of flawed home loans they sold to the two mortgage financiers, a move designed to spur the housing market. Watt said he would seek public input before deciding whether to increase the fees that Fannie Mae and Freddie Mac (FMCC) charge to guarantee loans.

New home sales dropped 14.5 percent to a 384,000 annualized pace in April, the weakest since July, according to Commerce Department data. The slump was concentrated in homes priced less than $300,000, showing that entry-level borrowers are being kept out of the market as prices and interest rates rise, and credit remains tight.

The companies, which buy loans and package them into securities, were seized by regulators as losses on risky loans brought them to the brink of bankruptcy. They received $187.5 billion in taxpayer funds to stay afloat before the housing-market turnaround propelled them to record profits.

Fannie and Freddie getting bigger isn’t likely to make a lot of people happy, particularly those who opposed their bailout in the first place. Adding to their balance sheets as a method of encouraging people to buy houses seems a lot like pre-financial crisis behavior. It’s disconcerting to think of the government taking a larger role in housing.