Banks Get Concession on Mortgage Fights With Fannie, Freddie

  • U.S. says arbitration can resolve disputes over flawed loans
  • Change could lead to increase in mortgage lending, MBA says

U.S. banks have complained for years that the risk of having to buy back flawed mortgages has discouraged them from lending. Now a regulator is offering a concession.

Under a plan announced Tuesday, mortgage lenders will be able to take disputes over home loans to an independent arbitrator. Fannie Mae and Freddie Mac, the mortgage-finance giants, will allow a third party to decide how grievances should be resolved after other options have been exhausted, the Federal Housing Finance Agency said in a statement.

The new arrangement gives lenders, and Fannie Mae and Freddie Mac, a way to avoid the possibility “that a dispute might languish unresolved for an extended period of time, as has often occurred in the past,” FHFA Director Mel Watt said in the statement. FHFA oversees the mortgage companies as part of a government conservatorship.

Lenders have tightened credit even beyond standards imposed by Fannie Mae and Freddie Mac to avoid repurchasing faulty mortgages. Government lawsuits over loans with errors have cost lenders tens of billions of dollars, making them more cautious about extending credit.

Tight Lending

Lending is still significantly tighter than it was prior to the housing crisis, in part because banks are worried about the risk of buying back mortgages, according to the Housing Finance Policy Center at the Urban Institute in Washington. New mortgages, which don’t include refinanced loans, dropped 33 percent to 3.1 million in 2014 from 4.65 million in 2001, the Institute said in a report last month.

Allowing arbitration along with other clarifications on when lenders have to buy back loans “will provide much needed certainty and transparency for lenders of all sizes and help broaden access to credit for borrowers,” David Stevens, the president of the Mortgage Bankers Association, said in a statement.

The arbitration system “means a lender isn’t necessarily going to have loans that are stuck in limbo some place,” Keith Gumbinger, vice president of loan-research site, said in a telephone interview. “It clarifies the responsibilities and provides an outlet for loans to be resolved.”

During the last two years of the housing boom that ended in 2007, bankers packaged more than $1.2 trillion of subprime mortgages into bonds. While many of the loans were made with little documentation to people with impaired credit, ratings companies such as Moody’s Investors Service gave the bonds grades that indicated they were as safe as U.S. Treasuries. Some of the bonds tied to those loans were sold to Fannie Mae and Freddie Mac.

Bank Settlements

After the collapse of the mortgage market, FHFA reached $17.9 billion in settlements with banks including Bank of America Corp., JPMorgan Chase & Co. and Goldman Sachs & Co.

The dispute-resolution program is available on loans delivered to Fannie Mae and Freddie Mac on or after Jan. 1, 2016.

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