(Adds background, details)
By Corbett B. Daly
WASHINGTON, July 28 Stricter lending standards adopted last year by Fannie Mae FNMA.OB are beginning to pay off as the mortgage finance giant's "new book" of business is the strongest in a decade, the firm's chief executive said on Wednesday.
Fannie Mae is emphasizing safer, long-term, fixed-rate loans and asking lenders to make loans on homes with better appraisals, to borrowers with better credit and better documentation of income.
"If you take all of these factors together, we're building the strongest book of business we've seen in the last decade," CEO Michael Williams said in remarks prepared for delivery to the group Women in Housing and Finance.
Fannie Mae and sister company Freddie Mac FMCC.OB buy up mortgages to free up lenders to lend again.
They have taken more than $145 billion from taxpayers since then-Treasury Secretary Henry Paulson seized them in 2008 as mortgage losses ballooned amid a housing market meltdown and severe financial crisis.
Williams said the tighter lending standards for Fannie Mae would make it harder for future generations to buy a home but "for the right reasons," as borrowers need to be prepared for homeownership to be successful homeowners.
"This is all healthy. It means we have a good chance to put in place a sustainable housing recovery, one with the right mix of owners and renters in this country," he said.
Homeownership rates fell from a peak of 69.0 percent in 2004 to 66.9 percent in the second quarter of this year, according to the Commerce Department. Each percentage point drop represents roughly a million former owners who have become renters again.
The tighter standards may be too strict.
"They are not helping credit-worthy borrowers obtain mortgage financing, which is a significant deterrent to the housing recovery," said Brian Chappelle, a housing consultant at Potomac Partners in Washington.
ADMINISTRATION PLAN BY JANUARY
Fannie Mae and Freddie Mac backed $192 billion in new mortgage originations in the second quarter, down 12.4 percent from the first three months of the year, according to data to be released Thursday by Inside Mortgage Finance.
Williams made the rare speech as public debate heats up on the future of Fannie Mae and Freddie Mac.
Treasury Secretary Timothy Geithner said on Tuesday the Obama administration would present its plan for the two firms to Congress by January.
And Congress is expected to hold hearings on the U.S. housing finance system in coming months. Some Republicans on Capitol Hill have called for the abolition of Fannie Mae and Freddie Mac.
That's unlikely to happen as Rep. Barney Frank, who heads the House Financial Services Committee with oversight over Fannie Mae and Freddie Mac, earlier this year said "you can't really tear down the old jail until you've built the new one."
Any new system could take years to implement.
The government directly or indirectly backed 82 percent of newly issued mortgages in the second quarter, including loans backed by the Federal Housing Administration and the Veterans Administration, according to Inside Mortgage Finance.
Williams declined to comment on possibilities for the future structure of Fannie Mae, but he said the firm "knows that change is coming."
"We understand that many options are on the table. And we feel confident that we are taking the steps necessary to prepare for all outcomes and put the company on the right track," Williams said.
The financial regulatory overhaul, which was signed into law by President Barack Obama last week, did not address reorganizing Fannie Mae and Freddie Mac, though it did restrict some mortgage lending practices that led to risky loans. (Reporting by Corbett B. Daly; Editing by Andrew Hay and Todd Eastham)