(Jul 25) — Fannie Mae and Freddie Mac will lose a carve-out in January 2021 that exempts the companies from a key post-financial crisis rule, a US regulator announced Thursday, an early step in the administration’s effort to overhaul the mortgage giants.
At issue is what’s known as the qualified mortgage rule, which the Consumer Financial Protection bureau implemented to curb abuses that triggered the 2008 meltdown. In announcing that it will let Fannie and Freddie’s exemption from the regulation expire, the CFPB also said Thursday it will start seeking public comment on how to revise the rule.
At its core, the qualified mortgage rule incentivizes lenders to make safer loans. Lenders aren’t required to issue mortgages that adhere to the regulation, but they have a strong motivation to do so because such loans insulate them from lawsuits if borrowers default. Under the rule, qualified mortgages can’t include terms like balloon payments and result in borrowers’ monthly debts exceeding 43% of their monthly incomes.
But to prevent the regulation from disrupting the mortgage market, when the CFPB first issued it, the agency included an exemption for Fannie and Freddie that lets them buy mortgages from lenders with higher debt-to-income ratios. This is known as the patch, and it has given Fannie and Freddie an effective monopoly over a large swath of riskier mortgages.
More than a quarter of all loans that were securitized and backed by Fannie and Freddie last year wouldn’t have been qualified mortgages without the patch, according to
from the Urban Institute. The carve out has enabled millions of consumers to get home loans.
Regulators have signaled that they want to revise the patch. Federal Housing Finance Agency Director Mark Calabria told Politico in May that it isn’t “very workable” and that he wanted to set a standard that everyone, not just Fannie and Freddie, could follow. The FHFA regulates the companies.
Fannie and Freddie don’t make loans; they keep the nation’s mortgage market humming by buying mortgages from lenders and packaging them into bonds that are sold to investors and guaranteeing their interest and principal.
The companies, which backstop about $5 trillion of mortgage securities, were put under government control during the financial crisis and got $191 billion in taxpayer money to weather the financial crisis. They have since returned to profitability and paid more in dividends to Treasury than they received in bailout funds.
The administration has pledged to end the government’s decade-long control over the companies, and the Treasury Department is expected to release a
for accomplishing that goal in August or September.
Source: Bloomberg Government