Mortgage Putback Threat Reduced for Lenders Under New Rules

The U.S. overseer of Fannie Mae and Freddie Mac, seeking to reduce the threat that banks will have to buy back flawed mortgages from the two firms, laid out new rules designed to spur lending and ease the housing crunch.

The changes will apply to future loans, not those that are the subject of current bank complaints that the taxpayer-owned companies are being too aggressive in forcing them to buy back loans made at the height of the housing bubble, the Federal Housing Finance Agency said today in a statement.

The new system, which takes effect on Jan. 1, should give banks more certainty about future costs by flagging potentially faulty mortgages earlier, FHFA said. Fannie Mae and Freddie Mac will use data collected on the loans they buy to spot potential defects, and will review samples within three months of purchase instead of waiting until borrowers default.

“Lenders want more certainly about their risk exposure, and the enterprises want to ensure the quality of the loans,” Edward J. DeMarco, FHFA’s acting director, said yesterday in a North Carolina speech where he outlined the changes.

Regulators including FHFA and the Federal Reserve have said that banks are shutting out otherwise eligible borrowers and demanding higher credit scores than necessary because they are afraid Fannie Mae and Freddie Mac will force them to repurchase loans if they become delinquent.

‘Lending Defensively’

David Stevens, president and chief executive officer of the Mortgage Bankers Association, said the rules probably will give banks more confidence that they won’t be forced to buy back loans unless there are serious problems with origination.

“Obviously, we need to see the details, but anything in this direction is really important, because lenders today are lending defensively,” he said today in a telephone interview.

Fannie Mae and Freddie Mac provide liquidity by buying mortgages from originators and packaging them into securities on which they guarantee payments of principal and interest. They also buy some loans to hold on their books.

Under the new rules, the companies won’t force lenders to repurchase defaulted loans if borrowers have made 36 months of consecutive on-time payments. Banks will be protected from buyback requests after only 12 months of payments for certain types of loans, such as those originated under the federal government’s Home Affordable Refinance Program, DeMarco said in the Raleigh, North Carolina, speech.

‘More Audits’

“Ultimately, better quality loan originations and underwriting, along with consistent quality control, will help maintain liquidity in the mortgage market,” he said.

While the changes are a “step in the right direction,” lenders could see more audits in the near future as the system ramps up, said Tim Rood, managing director of the Collingwood Group LLC, a Washington-based consulting firm.

“What you’re going to see is a surge in more audits, rather than less, just as companies are getting comfortable that the worst is behind them,” Rood said in a telephone interview yesterday.

The early reviews may cause lenders to raise underwriting standards instead of loosening them, Jaret Seiberg, senior policy analyst at Guggenheim Partners, said today.

“This is why we still see the putback policy as yet another factor that could add to what we worry will be a government-induced credit crunch in 2013,” Seiberg wrote in a market commentary. “How big of a factor this is will largely depend on how those initial loan reviews go.”

‘More Audits’

In the wake of the housing bubble, Fannie Mae and Freddie Mac have been reviewing files on defaulted loans originated between 2005 and 2009 for signs of faulty underwriting. In the first two quarters of this year, the two government-sponsored enterprises asked banks to buy back mortgages with an unpaid principal balance of $18.9 billion.

Banks usually end up paying about half of the unpaid principal balance when a putback demand is successful, according to the companies.

Fannie Mae and Freddie Mac will continue to work with lenders to resolve claims related to loans originated primarily before September 2008, the agency said in today’s statement.

Washington-based Fannie Mae and McLean, Virginia-based Freddie Mac were seized by the federal government in September 2008 after investments in risky mortgages pushed them to the brink of bankruptcy. They’ve received about $190 billion in aid since then, and the battle with banks over repurchases is part of their efforts to minimize losses.

Buy-Back Costs

Bank of America Corp., Wells Fargo & Co., JPMorgan Chase & Co., Citigroup Inc. and Ally Financial Inc., set aside almost $3 billion to buy back bad home loans in the first half of 2012, according to data compiled by Bloomberg. Regional lenders including Atlanta-based SunTrust Banks Inc. said they set aside at least $1.3 billion for such loan repurchases in the same period, exceeding their total for all of 2011.

In his speech at the American Mortgage Conference, DeMarco outlined future steps FHFA will take to shrink Fannie Mae and Freddie Mac’s footprint in the mortgage market.

The fees the enterprises charge to lenders to guarantee loans, which will have increased by 20 basis points by the end of the year, will continue to be raised, he said.

FHFA will also seek public input in October on a plan for creating a single platform for packaging loans into securities, he said. Currently, each company has its own platform.

The refinancing program for borrowers who owe more than their homes are worth will be updated by the FHFA, DeMarco said. “As we continue to gain insight from the program, we will make additional operational adjustments,” he said.

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