Fannie Mae and Freddie Mac have tightened their policies for purchasing high-priced, high-risk home loans from lenders amid stress in the housing market.
The policies issued Friday by the two government-sponsored companies were in response to a directive from the federal agency that regulates the mortgage finance giants.
The new policies potentially involve billions of dollars worth of so-called subprime mortgages, those targeted to people with tarnished credit or low incomes who are considered greater risks. The policies spell out to banks and other lenders which mortgages Fannie Mae and Freddie Mac will buy from them and which they will reject.
The two companies — which together finance or guarantee more than three-quarters of all U.S. home mortgages — pump money into the mortgage market by buying home loans from lenders and then bundling them into securities for sale on Wall Street.
Their new policies, which take effect Sept. 13, call on lenders to exercise caution in making subprime loans and to evaluate more carefully borrowers’ ability to repay them.
In addition, lending institutions should ensure that their risk-management practices keep pace with the growth and shifting risk profile of the subprime mortgages they hold, Fannie Mae and Freddie Mac said.
The head of the agency that oversees the companies, the Office of Federal Housing Enterprise Oversight, called their actions “a significant step.”
“These actions reinforce the necessity for safe and sound underwriting practices, which serve the interests of lenders and borrowers in promoting sustained homeownership,” said the agency’s director, James B. Lockhart.
Sheila Bair, the chairman of the Federal Deposit Insurance Corp., noted that Fannie Mae and Freddie Mac buy mortgages from banks as well as financial companies that do not fall under federal regulation.
The new policies, she said, “will create market pressure for improved standards among non-banks and help to ensure that responsible lenders are not left at a competitive disadvantage.”
The home-mortgage business has exploded in the last two decades with big Wall Street investment firms buying loans in bulk from banks and other lenders, complicating the mortgage industry picture. A patchwork of federal and state regulatory agencies hold jurisdiction over banks and non-bank financial companies, putting many subprime lenders outside federal regulation.
The latest moves came amid new signs of distress in the home mortgage market. The two biggest credit-rating agencies earlier this week downgraded billions in bonds backed by subprime mortgages. Home-mortgage delinquencies and foreclosures have surged in recent months, prompting anxiety that the distress could spill over into the broader economy.
The directive by OFHEO to Fannie Mae and Freddie Mac was similar to guidelines for banks, thrifts and credit unions regarding subprime mortgages that were issued by the Federal Reserve and the other four federal agencies that regulate them.