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Fannie Mae and Freddie Mac are the biggest pillars of support for U.S. housing, guaranteeing 59% of all mortgages being written.

By E. Scott Reckard and Tim Logan
October 17, 2014

Mortgage financing giants Fannie Mae and Freddie Mac, together with their federal regulator, have drawn up rules aimed at loosening constricted lending standards to make mortgages more affordable and easier to get for those with less than stellar credit.

The move comes in response to criticism that banks have clamped down too much on loan criteria to avoid legal liability for any mortgages they sell to Fannie or Freddie that may go bad in the future.

The two companies, seized by the government in 2008 as they teetered on financial collapse during the Great Recession, turned on lenders over mortgages that fell apart as the market melted down in 2007. Many loans were poorly underwritten, with some lenders accepting simply a borrower’s statement on income rather than verifying it.

Bankers have been forced to pay tens of billions of dollars in recent years to settle assertions that the bad loans violated representations and warranties made when the loans were sold and demanding that the banks repurchase them.

In reaction, lenders have drawn their purse strings tighter than Fannie and Freddie require when evaluating loan applications, saying the threat of repurchase demands makes the risks worth taking only for borrowers with excellent credit profiles.

The clearer guidelines are intended to convince lenders that they won’t regret lending to higher-risk but still worthy borrowers, according to people briefed on the matter, who spoke on condition of anonymity because the program won’t be announced formally until next week.

Under the new rules, the financing firms would delineate what constitutes cause for requiring banks to repurchase loans. They also would reduce the minimum down payment to 3% from 5% generally needed to qualify for selling the loans to Fannie and Freddie.

The changes resulted from discussions that trade group Mortgage Bankers Assn. arranged between lenders and Fannie, Freddie and their regulator, the Federal Housing Finance Agency.

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