(Recasts, adds analyst comment, details, byline)
By Al Yoon
NEW YORK Feb 17 The federal regulator of
Fannie Mae and Freddie Mac on Wednesday proposed an overhaul of
government rules on how the mortgage funding giants serve
low-income homeowners while limiting their risks.
The Federal Housing Finance Agency wants new goals that
would target borrowers with lower incomes than in the past --
including families with incomes at or below 80 percent of their
area's median, down from 100 percent -- while giving Fannie Mae
and Freddie Mac more flexibility in measuring success.
In a twist from past practices, the proposals would
prohibit Fannie Mae FNM.N and Freddie Mac <FRE.N, the two
biggest sources of U.S. housing finance, from buying home
equity loans and Wall Street's mortgage securities to satisfy
Analysts said the proposals are likely aimed to balance the
companies' support of the housing market while preventing them
from making hazardous expansions to fulfill requirements.
Both companies are still reeling from purchases of some of
the riskiest loans during the housing boom, which have caused
billions of dollars in losses that are now being subsidized by
the U.S. Treasury.
Fannie Mae and Freddie Mac, which were seized by the
government in September 2008 after losses threatened their
ability to stabilize a faltering housing market, agree to
purchase mortgages outright from lenders or to bundle them into
mortgage securities. Those practices relieve banks of the risks
of the mortgages and free up banks' balance sheets to allow
them to make more loans.
The proposed rules "are 'better' in that the GSEs are less
likely to be faced with having to make 'risky' decisions in
order to hit arbitrary goals," Thomas Lawler, founder of Lawler
Economic & Housing Consulting and a former Fannie Mae senior
vice president, said in an e-mail.
Fannie Mae and Freddie Mac had aggressively purchased
so-called "private-label" securities to help fulfill goals as
Wall Street banks took a larger share of the U.S. mortgage
business. Those mortgages contained subprime and other risky
loans whose rising delinquencies are seen as the trigger to the
global financial crisis.
The companies during the housing boom had to stretch to
meet affordable housing goals, which lowered their standards,
James Lockhart, the former head of the FHFA, said this month.
Fannie Mae and Freddie Mac executives were also pushed to be
more aggressive by equity investors, without any checks from
debt holders who felt protected by an implicit government
guarantee, he said.
Since being seized by the government, Fannie and Freddie
have required some $111 billion in Treasury support and have
said they would need more as they administer government
foreclosure prevention efforts.
"FHFA does not intend for the enterprises to undertake
uneconomic or high-risk activities in support of the goals, nor
does it intend for the enterprises' state of conservatorship to
be a justification for withdrawing support from these market
segments," the FHFA said in a statement.
Affordable housing goals were previously set by the U.S.
Department of Housing and Urban Development.
In addition to "benchmark" goals, Fannie Mae and Freddie
Mac may also use a "market-based alternative" measure to meet
their goals, the FHFA said. Instead of being only based on a
set percentage, they allow for deviations resulting in changes
in the market from what was forecast.
(Editing by Leslie Adler)