Fannie Refused to Punish Countrywide for Bad Debt, Lockhart Says

Fannie Mae refused to seek large amounts of mortgage repurchases from Countrywide Financial Corp. as housing began to crash, according to the former head of its regulator.

James Lockhart, who led the Federal Housing Finance Agency until 2009 and its predecessor, the Office of Federal Housing Enterprise Oversight, “spent a lot of time” pushing Fannie Mae executives to seek more so-called putbacks on Countrywide loans that failed to match their promised quality, he said today.

“They didn’t want to offend their largest customer,” Lockhart, now the vice chairman at investment firm WL Ross & Co., said during a speech at a Mortgage Bankers Association conference in New York.

Trends in mortgage-repurchase demands are among “procyclical” issues in the market, or items that can lead to looser credit during a boom and tighten standards during tougher times, Lockhart said. Policy makers should strive to lessen the dynamic as they remake the housing-finance system, he said.

“If people had known how bad the repurchases were going to get, we’d certainly have had a lot more disciplined underwriting,” Lockhart said in an interview. His discussions with Fannie Mae (FNMA) officials about Countrywide loans took place in 2006 or 2007, he said.

Fannie Mae and competitor Freddie Mac, the mortgage-finance companies, are being sustained on injections of taxpayer capital after being seized in 2008. Countrywide, once the largest U.S. home lender, was bought by Bank of America Corp. that year.

Bank of America’s backlog of pending demands for repurchases reached a record $16.1 billion last quarter as a dispute deepened between Fannie Mae and the second-largest U.S. deposit-taker. In January, Fannie Mae stopped accepting new loans from the company.

To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net