NEW YORK (Reuters) - Fannie Mae FNM.N has told lenders that it will require a minimum credit score for the loans it buys, tightening mortgage standards to protect itself from record foreclosures sweeping the country.
Lawmakers have been pressuring the largest U.S. home funding company, along with its rival Freddie Mac FRE.N, to more aggressively buy home loans in a bid to lower mortgage rates and prop up housing.
However, the two government-chartered companies are battling their own problems as home loans sour. In response to soaring mortgage defaults, they are increasing fees, restricting the loans they purchase and trying to preserve and raise capital.
The latest steps are part of amended underwriting practices for loans Fannie Mae buys, aimed at adjusting prices to reflect heightened housing market risk and protecting the company’s capital, Fannie Mae spokesman Brian Faith said in a statement on Wednesday.
Fannie Mae will require a minimum score of 580 for most loans, adding it will still acquire loans with lower credit scores in certain circumstances.
Credit scores generally range between 300 and 850 and are used by lenders to predict a borrower’s ability to pay on time.
Mortgages with credit scores below 620 made up less than 6 percent of Fannie Mae’s conventional single-family business volume in 2007, according to the company’s annual report. It didn’t provide further breakdown in the report.
Fannie also said it will lengthen the period needed for borrowers to reestablish their credit history after a foreclosure to five years from four years.
It will allow shorter recovery periods for borrowers with “documented extenuating circumstances” which caused the foreclosure, the company said.
“Given the current state of the mortgage and housing markets, it is critical for our company to conservatively manage our business and risks through prudent pricing and underwriting, while providing sustainable liquidity to our lender customers and stability to the markets as part of our core mission,” Faith said in the statement.
Fannie Mae has extended forbearances for struggling homeowners in another move intended to ease stress on the company’s capital.
The move allows temporary suspensions or reduced payments by borrowers for up to six months, up from four months, Jason Allnutt, a vice president for credit loss management at Fannie Mae in Dallas, told Reuters on Tuesday.
Giving homeowners greater leeway will help Fannie Mae limit the costly process of buying bad loans out of the $2.5 trillion in mortgage-backed securities it guarantees. Under standard accounting rules, buying mortgages out of MBS trusts forces the company to revalue the loans at market levels, which last year boosted fair value losses sevenfold to $1.4 billion.
Greater flexibility for homeowners eases the strain on Fannie Mae’s capital, which is at the crux of the company’s struggle to balance its role to support housing and staunch losses.
Fannie Mae and rival Freddie Mac support home ownership by raising money from investors to support combined investments of $1.4 trillion, and guarantee loans that are repacked into mortgage securities which then they sell.
Fannie Mae and Freddie Mac under an agreement with their federal regulator are expected to raise at least $6 billion in fresh capital to stabilize the market with new investments.
Reporting by Justin Grant and Lynn Adler and additional reporting by Al Yoon