Eased Buyback Rules May Boost Fannie-Freddie Risk, Auditor Says

Lenders could benefit at the expense of Fannie Mae and Freddie Mac because the Federal Housing Finance Agency didn’t adequately assess the risk of new rules for handling loan buybacks, an auditor’s report said.

FHFA failed to ensure the government-owned companies had the right infrastructure in place before requiring them to change the way they review mortgages for defects, according to a report released today by the agency’s Office of Inspector General. The regulator also may be relieving lenders of liability for flawed loans too early, according to the report.

“The potential consequences of continued implementation of the new framework are substantial,” the auditor said.

The critique takes aim at a central part of U.S. efforts to ease tight credit conditions that are threatening the health of the housing market.

Fannie Mae and Freddie Mac buy mortgages from banks and package them into securities. When loans default, the companies require lenders to buy them back if they find origination flaws such as improperly computed borrower income or missing documents.

FHFA last year tried to ease lenders’ fears that they’d be stuck with losses on bad loans by announcing that Fannie Mae and Freddie Mac would review files soon after origination instead of waiting for defaults. In the hope of persuading banks to lend to riskier borrowers, the agency also said lenders would be cleared of liability on loans after borrowers pay steadily for three years.

The regulator relaxed the rules even more this year, agreeing to waive liability even if borrowers miss two payments within the first 36 months after the companies buy a loan.

In a written response to the audit, FHFA officials said they’d continue to review whether Fannie Mae and Freddie Mac have adequate systems to monitor a sample of loans early after they’ve been originated. They said they wouldn’t reconsider whether relieving lenders of liability after three years exposes the companies to too much risk.

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