Seeking to reassure home lenders, the government's top overseer for
Federal Housing Finance Agency Director Mel Watt also said the agency would release guidelines "in the coming weeks" to allow increased lending to borrowers with down payments as low as 3% by considering "compensating factors."
Speaking Monday at an industry convention, Watt offered an olive branch to lenders who sell loans to Fannie and Freddie, saying he hoped they would loosen overly tight lending standards imposed on borrowers with less than perfect credit profiles.
Regulators and bankers alike have said these so-called overlays can cause unfair denial of credit to first-time buyers, self-employed borrowers, people who switch jobs and those recovering from financial wounds caused by the recession.
That in turn has contributed to sluggish home sales, a drag on the economic recovery and lower profits on mortgages as banks reduced sales to Fannie and Freddie.
Fannie and Freddie, bailed out by the government in 2008, buy bundles of home loans from lenders and sell securities backed by the mortgages, guaranteeing payment to investors if the borrowers default.
If the loans go sour, Fannie and Freddie can force the banks to buy them back or pay compensation if the characteristics of the mortgages were misrepresented when they were sold.
Watt said Fannie and Freddie would not force repurchases of mortgages found to have minor flaws if the borrowers have near-perfect payment histories for 36 months.
He also said flaws in reporting borrowers' finances, debt loads and down payments would not trigger buy-back demands so long as the borrowers would have qualified for loans had the information been reported accurately.
Watt spoke in Las Vegas at a conference of the Mortgage Bankers Assn. The trade group's chief executive, David Stevens, said the remarks "represent significant progress in the ongoing dialogue" between the industry, regulators and Fannie and Freddie.
While holding lenders accountable for material mistakes, Watt's speech "acknowledges the fact that minor, immaterial loan defects should not automatically trigger a repurchase request," Stevens said.
"As a result, lenders will be more confident in offering mortgages to qualified borrowers," he said.
Watt acknowledged that his agency in the past "did not provide enough clarity to enable lenders to understand when Fannie Mae or Freddie Mac would exercise their remedy to require repurchase of a loan."
"We know that this issue has contributed to lenders imposing credit overlays that drive up the cost of lending and also restrict lending to borrowers with less than perfect credit scores or with less conventional financial situations," he said.