Fannie, Freddie Ease Rules for Mortgage Lenders

Mortgage lenders on Wednesday received new assurances from mortgage-finance giants Fannie Mae and Freddie Mac that they won't be slammed with onerous penalties for what they say are relatively minor errors made when underwriting loans.

Fannie and Freddie released new guidelines detailing the remedies lenders will be responsible for providing should errors be found in loans they sell to the companies. The goal, the companies say, is to persuade the lenders to expand mortgage access to riskier borrowers.

Fannie and Freddie don't make loans. Instead, they buy mortgages that meet certain requirements, wrap them into securities and provide guarantees to make investors whole if the mortgages default.

After the financial crisis, Fannie and Freddie found billions of dollars of mortgages they said contained errors, prompting the mortgage companies to demand that lenders buy back the loans.

Lenders bristled, believing the punishment sometimes was too extreme for the errors committed. As a result, they pulled back from lending to borrowers with weaker credit, even if such borrowers technically qualified for Fannie- and Freddie-backed mortgages.

To allay lenders' concerns and broaden mortgage access, Fannie, Freddie and their federal regulator have worked over the past few years with lenders to define more clearly the repercussions they would suffer for making errors. Last fall, for example, the companies reached an agreement with lenders on what kinds of errors they'd still be liable for years after making a mortgage.

On Wednesday, Fannie and Freddie said that rather than require lenders to buy back loans with insignificant defects, it would require them to pay Fannie or Freddie what would have been paid to the companies had the details been accurate.

"Lenders consistently tell us that concerns about repurchases limit their willingness to lend, so we're trying to put those concerns to rest," said Fannie Mae Executive Vice President Andrew Bon Salle in a statement.

There are signs the efforts are working. A Fannie Mae survey released last month said 23% of lenders believed credit standards on Fannie- and Freddie-eligible loans had eased over the past three months, versus 12% a year earlier.

On the other hand, merely 13% said that such standards had eased on loans backed by government agencies including the Federal Housing Administration, which is currently undergoing a more contentious effort to clarify lenders' underwriting liabilities.

In a statement, David Stevens, president of the Mortgage Bankers Association, a trade group, said Wednesday's release "will add additional clarity to the broad lending community, which should help lenders' confidence to lend knowing that nonmaterial errors that would not lead to default will not expose the lender to abusive risks."

Write to Joe Light at [e-mail]

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October 07, 2015 17:45 ET (21:45 GMT)

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