New Fannie Mae Regulator Moves to Loosen Mortgage Credit

The new head of the Federal Housing Finance Agency (FHFA) has announced plans that would ramp up government involvement in the housing market, instead of reducing its footprint as many in Congress have argued for.

Even though the House and Senate are currently debating bills that seek to phase out the existence of mortgage-backing companies Fannie Mae and Freddie Mac, FHFA Director Mel Watt laid out a few new policy changes for both firms that would increase their presence in the market.

“Our goals are consistent with operating Fannie and Freddie in the here and the now, and we’ll do that until there is legislation passed,” said Watt said Tuesday in his first major public speech as director.

The policy changes include allowing government-run Fannie and Freddie to continue to guarantee mortgages up to $417,000 as a general rule and loans as much as $625,500 in the nation’s priciest areas. The plan before Watt arrived had been to reduce those limits in order to push more business out to private lenders.

Also nixed was the proposal to require borrowers to contribute 20 percent or more in down payments in order to qualify for Fannie and Freddie backing, part of the 2010 Frank-Dodd legislation that attempted to tighten up mortgage lending in the wake of the financial crisis. The new down payment percentage is yet to be determined but will likely be no more than 10 percent, if that.

Another significant policy divergence Watt announced was that mortgage loans will not automatically lose Fannie and Freddie backing if the borrowers miss two payments in the first three years. Until now, the firms could require lenders to buy back loans that fit that description, a policy that according to Watt “undermines the goal of improving access to mortgage credit for creditworthy borrowers.”

Watt’s plans are in stark contrast to the actions of the previous acting director, Edward DeMarco, who sought to shrink the size and role of Fannie and Freddie during the past several years. Yet under his oversight, Fannie and Freddie made big comebacks to become one of the government’s biggest money-making entities. That may be one reason for the reversal of goals for the two giant firms that have been in government conservatorship since 2008.

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