Mortgage Buyback Rules Overhauled, Banks Breathe Sigh of Relief

The mortgage finance industry breathed a sigh of relief on Tuesday after the regulator for Fannie Mae and Freddie Mac released details on the types of home loans banks would be required to buy back.

Government-controlled Fannie Mae and Freddie Mac buy mortgages from banks that they then repackage as securities for investors. The mortgage companies and banks have been embroiled in a dispute over which group should shoulder the losses from loans gone bad.

"It's a step in the right direction to provide some sunset on the 'gotcha' provisions that have existed," said Hank Cunningham, president of Cunningham & Co, an independent mortgage company in Greensboro, North Carolina. "But the devil's in the details."

Currently , banks are required to provide assurances also known as "representations and warranties" about the quality of mortgages they sell to Fannie Mae and Freddie Mac.

If those assurances are breached and the mortgages do not comply with Fannie Mae and Freddie Mac's underwriting and documentation standards, then the mortgage financiers can force the bank to buy back the loan.

The new representation and warranty guidance gives banks and other mortgage lenders more clarity on which mortgages would be exempt, such as those that have been performing for a consecutive 36-months.

Also, the government-controlled companies will review the mortgage shortly after they have bought the loan from the bank rather than after the mortgage has defaulted, under the new rules crafted by their regulator, the Federal Housing Finance Agency.

Although the changes only apply to loans sold to the mortgage financiers after Dec. 31, the industry said they would bring much needed certainty.

"The plan outlined today should give lenders the confidence they need to help more qualified borrowers," said David Stevens, president of the Mortgage Bankers Association, which represents the mortgage finance industry.

The American Bankers Association, which represents all U.S. banks, said the new standards would increase business certainty, reduce operating costs and ultimately lower credit costs to borrowers.

The government took control of Fannie Mae and Freddie Mac in the fall of 2008, when the companies' mortgage-related losses threatened to wreak havoc on the financial system.

The Obama administration has said it wants to reduce the government's role in the housing finance market -- where Fannie Mae and Freddie Mac underwrite the bulk of new home loans.

The Federal Housing Finance Agency has taken incremental steps designed to encourage private capital back in the market. It said the new guidance would help maintain liquidity in the mortgage market while protecting the companies from loans that were not properly underwritten.

The Center for American Progress, a think tank with close ties to the Obama administration, said it was unclear what the overall impact would be on the market liquidity.

"To the extent that the representation and warranty exposures have been limiting access to credit, (the new standards) should help," said Julia Gordon, the center's director of housing finance and policy.

"But at the same time it is not clear that more scrutiny on the front end will make lenders equally uneasy about making loans," she said.