Government urges banks to increase lending, even as it demands mortgage buy-backs

June 19, 2012 09:00AM

After demanding banks buy back some $80 billion worth of flawed loans over the last three years, the government-controlled mortgage agencies are now working to help banks increase lending while simultaneously avoiding a similar fate in the future. Bloomberg News reported that the Federal Housing Finance Agency, which regulates Fannie Mae and Freddie Mac, is concerned that banks are over-tightening their lending standards in response to the perceived buy-back threat and stifling the housing market. Banks have been requiring credit scores on government-backed loans 100-200 points higher than minimums set by the agencies. The average score for government-backed loan hovers around 760. That standard is met by just 40 percent of Americans, shutting out between 10 percent and 20 percent of worthy borrowers, according to Shaun Donovan, the secretary of the Department of Housing and Urban Development.

“The lenders perceive the pendulum has swung too far, and they’re being held accountable for things beyond their control,” said Brian Chappelle, a partner at the bank consulting firm Potomac Partners. “Their reaction is going to be to tighten up.”

In the first quarter, Fannie and Freddie demanded banks buy back $15.3 billion in mortgages in their ongoing effort to minimize losses following taxpayer bailouts. Banks typically end up paying half of the unpaid principal balance when they are forced to buy back mortgages. [Bloomberg]