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Fannie, Freddie to stay in loan market

With the mortgage giants stabilized, US reconsiders shrinking their role

Decisions outlined Tuesday include keeping current loan-size limits at Fannie and Freddie.

EPA/File 2007

Decisions outlined Tuesday include keeping current loan-size limits at Fannie and Freddie.

WASHINGTON — The federal overseer of Fannie Mae and Freddie Mac on Tuesday announced policies that would maintain the mortgage giants’ role in parts of the housing market, spur more home lending, and aid distressed homeowners.

It’s a significant shift in strategy for the mortgage financiers, driven by the new director of the Federal Housing Finance Agency, Melvin L. Watt.

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“Our overriding objective is to ensure that there is broad liquidity in the housing finance market and to do so in a way that is safe and sound,” Watt said in remarks at the Brookings Institution in Washington.

Watt revealed a number of changes that would perpetuate the two government-sponsored enterprises’ presence in mortgage finance, rather than shrink it. Fannie and Freddie, which back about two-thirds of new mortgages, will keep current limits on the size of loans they guarantee, rather than reduce the limits, as previously proposed.

“This decision is motivated by concerns about how such a reduction could adversely impact the health of the current housing finance market,” Watt said.

The new director also loosened rules that obligated banks to “buy back” distressed loans. He said the mortgage financiers will now allow two delinquent payments in the first 36 months after their acquisition of a loan, and that they would eliminate “automatic repurchases when a loan’s primary mortgage insurance is rescinded.”

Those changes might stimulate mortgage lending. Many banks have tightened credit standards, in part because of the requirement that they take losses if borrowers default.

In addition, Watt said he was looking into “an independent dispute resolution program when lenders believe a repurchase is unwarranted” and clarifying Fannie and Freddie’s underwriting rules.

Watt said the housing institutions would do more to communicate with the 750,000 homeowners who might benefit from the Home Affordable Refinance Program, which helps them modify loans.

He said he would not change the eligibility requirements for that program, though, because the number of additional borrowers who might be helped is “relatively small.”

Fannie and Freddie have returned to profitability, and Congress has started to consider how to remove them from government conservatorship. The government rescued them in 2008 with a $190 billion bailout. They have stabilized and paid about $200 billion in dividends to the government.

Both Democrats and Republicans have argued the companies should be returned to the private market or wound down. But the fragile housing recovery and concerns about regulations have forestalled any legislation.

Watt was confirmed as head of the Federal Housing Finance Agency late last year. His predecessor, Edward J. DeMarco, frequently clashed with Democrats, refusing to put in place a White House proposal to reduce the principal on so-called underwater mortgages.

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