WASHINGTON Mortgage financiers Fannie Mae FNMA.OB and Freddie Mac FMCC.OB will limit their purchases to loans that meet a new federal definition of a "qualified mortgage" starting next year, the housing giants' regulator said on Monday.
The definition comes from new rules finalized earlier this year that require mortgage lenders to verify borrowers' ability to repay their loans.
Lenders who issue qualified mortgages, which may have fees that add up to no more than 3 percent of the loan amount and loan terms of up to 30 years, are assumed to meet the ability-to-repay requirement and receive some protection from lawsuits.
The Federal Housing Finance Agency (FHFA) said the two government-owned companies would buy only loans that meet that definition or that are exempt from the ability-to-repay rules.
"Adoption of these new limitations by Fannie Mae and Freddie Mac is in keeping with FHFA's goal of gradually contracting their market footprint and protecting borrowers and taxpayers," the regulator said in a statement.
Fannie Mae and Freddie Mac provide financing to banks and other lenders by purchasing mortgages to either hold or repackage as securities that are sold to investors. They were seized by the government in 2008 as mortgage losses mounted during the financial crisis.
The two, which do not make loans, back about half of existing home loans. The government-sponsored enterprises have received $187.5 billion of taxpayer funds to stay afloat.
After poor underwriting standards helped fuel the 2007-2009 financial crisis, the Dodd-Frank law created the Consumer Financial Protection Bureau and told it to write rules that would force lenders to make sure borrowers could pay back loans.
The law also called for a category of safer, lower-priced loans that lenders could make in exchange for some protection from lawsuits arising from ability-to-repay disputes.
The bureau issued its final rules in January and said the requirements would take place in January 2014. In addition to capping loan terms and fees, it said qualified mortgages must go to borrowers whose debt does not exceed 43 percent of their income.
While experts said the rules were less onerous than banks feared, some lenders said there would be little incentive to issue non-qualified mortgages. The FHFA's directions to Fannie and Freddie to buy only qualified loans could cause such concerns to resurface.
The consumer bureau did not immediately respond to a request for comment on the FHFA announcement on Monday.
The FHFA said the companies would be allowed to buy loans that fit a temporary qualified mortgage status that the CFPB created to ease the transition to its new requirements.
(Reporting by Emily Stephenson; Editing by Jan Paschal)