Federal regulators bank on new plan to stimulate mortgage lending

The Federal Housing Finance Agency announced a new plan Monday to guide banks through the lending process in a way that minimizes financial institutions’ risk of being forced to buy back bad mortgages, the Wall Street Journal reported.

Since the housing market’s collapse, Fannie Mae and Freddie Mac have forced banks to repurchase $75 billion worth of distressed mortgages. Banks’ are fearful of finding themselves in similar situations, and that has resulted in a tight lending environment.

The new plan from federal regulators releases banks from buying back loans with a solid record of punctual payment in the first 36 months, or for the first 12 months on loans within an existing refinancing initiative. The government hopes that less risk for banks will in turn stimulate lending, but the rules do not go into effect until next year.

“For the market to reclaim the strength it once had — and to provide a cornerstone for the mortgage market of the future — it is vital we consider ways to improve” Edward DeMarco, Federal Housing Finance Agency director, said at a conference Monday. [WSJ] – Christopher Cameron