Here’s the next moral dilemma in the housing market: keep lending standards high to prevent future crises or help more people qualify for home loans by loosening credit standards. It doesn’t seem like both goals can be accomplished simultaneously at this point. And apparently, U.S. mortgage regulators are opting for looser standards.
A new rule was released last week by the Federal Housing Finance Agency that would theoretically help banks make more loans. The rule says that if a mortgage borrower makes their payments for 36 consecutive months, Fannie Mae and Freddie Mac could not ask banks to buy back those loans if they then discover underwriting or appraisal problems. (Fannie and Freddie are the government-backed mortgage companies that buy up mortgages from lenders across the country.) The new clause essentially limits the window of responsibility for banks on the loans they make.
The hope is that lenders will not feel like they are taking on as much risk by loaning to borrowers with lower credit scores, allowing more people into the housing market and speeding the recovery. Yet others believe this once again makes it easier for banks to make bad loans that could end up on the taxpayer tab.
At this point Fannie and Freddie are still trying to collect roughly $17.5 billion worth of repurchase requests on toxic loans it bought from banks between 2005 and 2008. That’s all taxpayer money, as is the $188 billion its already taken from the beginning of the housing crisis to keep Fannie and Freddie themselves from going under.
Still, the FHFA maintains the new rule will not affect the quality of loans that banks will have to make in order to sell them to Fannie and Freddie. Said Maria Fernandez, the FHFA’s associate director for housing and regulatory policy in a Reuters article,
“Our intent certainly is not to increase the risk exposure to Fannie Mae or Freddie Mac or the taxpayer.”