Fannie Mae, Freddie Mac Meet Subprime Loan Regulations

Mortgage giants Fannie Mae and Freddie Mac have implemented new federal guidelines regarding the purchase of risky subprime loans, according to the regulator for the two companies.

Last month, the Office of Federal Housing Enterprise Oversight directed Washington, D.C.-based Fannie Mae and McLean, Va.-based Freddie Mac to apply tighter standards for buying bad credit mortgage loans.

The oversight office had requested that nontraditional and subprime loans purchased by the two companies comply with the new guidelines for subprime lending no later than Sept. 13.

Fannie Mae and Freddie Mac hold about $370 billion in private-label securities, almost all of which carry the highest investment-grade rating. About $170 billion of those securities are backed by subprime mortgages, according to the regulator.

The two companies have pledged to continue supporting subprime borrowers. Fannie Mae has said it will purchase “tens of billions” of dollars in subprime loans over the next several years. Freddie Mac has said it will buy $20 billion of these loans, according to their regulator.

“These actions, which address the practices of both regulated and unregulated mortgage originators, reinforce the historic and statutory role of Fannie Mae and Freddie Mac in promoting market liquidity through standardization of mortgage underwriting,” said James Lockhart, director of the Office of Federal Housing Enterprise Oversight.

Defaults by borrowers with spotty credit has helped fuel a downturn in the mortgage and housing markets, which has spilled over to home buyers with strong credit, leading to falling home prices, an increase in the supply of new and existing homes and a credit crunch affecting private equity deals, commercial finance transactions and other investments.

Both Fannie Mae and Freddie Mac have asked for the flexibility to increase the holdings of their mortgage-related portfolios to help address deteriorating conditions in the secondary mortgage market.

Lockhart said a month ago that his agency will “keep under active consideration requests for an increase in the portfolio caps, but we are not authorizing any significant changes at this time.”