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Reducing lending risk will cost borrowers

Fannie/Freddie director offers options

- The Washington Times - Monday, September 19, 2011

RALEIGH, N.C. Government-controlled mortgage buyers Fannie Mae and Freddie Mac may reduce taxpayer risk by requiring more mortgage insurance from borrowers and charging lenders higher fees, steps that could increase borrowing costs, the head of their government caretaker agency said Monday.

Reshaping the mortgage giants three years after the federal government took them over requires spreading lending risks, Federal Housing Finance Agency acting director Edward DeMarco said Monday at a mortgage conference in Raleigh.

The changes that could lead to higher costs for borrowers would be pursued gradually over time to avoid shocking the weak housing market, Mr. DeMarco said. But with Washington still unable to restructure Fannie and Freddie, the FHFA needed to act under its own statutory authority to ensure Fannie and Freddie continued to keep money flowing into financing home purchases, Mr. DeMarco said.

"We all knew that reforming the housing finance system was going to be difficult, but I think the general expectation was that more progress would have been made by now," Mr. DeMarco said.

Reducing the risk to taxpayers may mean private interests taking on more risk, perhaps by requiring more private mortgage insurance from borrowers and higher fees from lenders to guarantee loans, Mr. DeMarco said.

The federal government took control of the two massive mortgage buyers in 2008 to prevent their collapse as the housing market deteriorated. Officials in the George W. Bush administration said the action was needed to protect taxpayers and continue the availability of mortgages.

Fannie and Freddie buy home loans from banks and other lenders, package them into bonds with a guarantee against default, and sell them to investors around the world. The mortgage giants charge lenders a guarantee fee that covers projected credit losses from borrower defaults over the life of the loans. Fannie and Freddie likely will begin increasing those fees starting next year, Mr. DeMarco said.

Changes in loan guarantee fees could vary based on the risk of loans and the borrower's location, with higher fees in states where it is more expensive and time-consuming for banks to foreclose on property, he said.

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