Financial Regulatory Forum

Fannie, Freddie regulator pitches new housing goals

February 17, 2010

By Al Yoon

NEW YORK, Feb 17 (Reuters) – The federal regulator of Fannie Mae and Freddie Mac on Wednesday proposed an overhaul of government rules on how the mortgage funding giants serve low-income homeowners while limiting their risks.

The Federal Housing Finance Agency wants new goals that would target borrowers with lower incomes than in the past — including families with incomes at or below 80 percent of their area’s median, down from 100 percent — while giving Fannie Mae and Freddie Mac more flexibility in measuring success.

In a twist from past practices, the proposals would prohibit Fannie Mae and Freddie Mac, the two biggest sources of U.S. housing finance, from buying home equity loans and Wall Street’s mortgage securities to satisfy the goals.

Analysts said the proposals are likely aimed to balance the companies’ support of the housing market while preventing them from making hazardous expansions to fulfill requirements.

Both companies are still reeling from purchases of some of the riskiest loans during the housing boom, which have caused billions of dollars in losses that are now being subsidized by the U.S. Treasury.

Fannie Mae and Freddie Mac, which were seized by the government in September 2008 after losses threatened their ability to stabilize a faltering housing market, agree to purchase mortgages outright from lenders or to bundle them into mortgage securities. Those practices relieve banks of the risks of the mortgages and free up banks’ balance sheets to allow them to make more loans.

The proposed rules “are ‘better’ in that the GSEs are less likely to be faced with having to make ‘risky’ decisions in order to hit arbitrary goals,” Thomas Lawler, founder of Lawler Economic & Housing Consulting and a former Fannie Mae senior vice president, said in an e-mail.

Fannie Mae and Freddie Mac had aggressively purchased so-called “private-label” securities to help fulfill goals as Wall Street banks took a larger share of the U.S. mortgage business. Those mortgages contained subprime and other risky loans whose rising delinquencies are seen as the trigger to the global financial crisis.

The companies during the housing boom had to stretch to meet affordable housing goals, which lowered their standards, James Lockhart, the former head of the FHFA, said this month. Fannie Mae and Freddie Mac executives were also pushed to be more aggressive by equity investors, without any checks from debt holders who felt protected by an implicit government guarantee, he said.

Since being seized by the government, Fannie and Freddie have required some $111 billion in Treasury support and have said they would need more as they administer government foreclosure prevention efforts.

“FHFA does not intend for the enterprises to undertake uneconomic or high-risk activities in support of the goals, nor does it intend for the enterprises’ state of conservatorship to be a justification for withdrawing support from these market segments,” the FHFA said in a statement.

Affordable housing goals were previously set by the U.S. Department of Housing and Urban Development.

In addition to “benchmark” goals, Fannie Mae and Freddie Mac may also use a “market-based alternative” measure to meet their goals, the FHFA said. Instead of being only based on a set percentage, they allow for deviations resulting in changes in the market from what was forecast. (Editing by Leslie Adler) ((albert.yoon@thomsonreuters.com; Tel: +1 646-223-6347; Reuters Messaging: albert.yoon.reuters.com@reuters.net))

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