The federal agency in charge of Fannie Mae and Freddie Mac wants the mortgage giants to reduce their exposure to risky loans, intended to make homeownership more affordable, in order to be prepared for a possible economic downturn.
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At the behest of the Federal Housing Finance Agency, the two companies are scaling back the proportion of loans they back to borrowers with small down payments and mortgages to deeply indebted borrowers, according to The Wall Street Journal, which first reported the news.
The FHFA did not immediately respond to FOX Business’ request for comment.
Reining in risk could limit their defaults and producer bigger profits, possibly helping the firms appeal to investors as the FHFA looks to take both companies public — something that will require billions of dollars in funding.
“Some of this really is a reflection of the increased emphasis and focus on: let’s do what we need to do to get out of conservatorship,” FHFA director Mark Calabria told the Journal.
Critics argue the decision threatens the mission of Fannie and Freddie to make housing more affordable.
Earlier this summer, Fannie and Freddie tightened their requirements backing mortgages to borrowers with just 3 percent down payments. The firms said borrowers can’t have an income of more than 80 percent of the median, according to the Journal, reversing its previous policy that allowed consumers to qualify if their income was as high as the area median.
Low-down-payment loans are considered riskier because if home prices drop, it can leave borrowers in a lurch, owing more than their homes are worth. Calabria said he wants to make sure the companies won’t require another bailout and to avoid making loans that could go bad during a downturn.
“I think there’s a lot of evidence that we’re near the top of this cycle,” he told the Journal. “It would be counter to their mission where we get borrowers into loan products that would leave them vulnerable in a downturn.”
During the financial crisis, George W. Bush's administration took control of Fannie and Freddie, which nearly failed after backing loans to borrowers who couldn’t pay them, placing them in a conservatorship by the FHFA and removing their top executives in order to keep the nation’s housing market afloat. The companies, which owned about $5 trillion in home loans, buy mortgages from banks and package them into securities that they either hold or sell to U.S. and foreign investors.