Fannie Mae and Freddie Mac financing riskier mortgages to indebted homeowners

National /
May.May 13, 2019 05:30 PM
Fannie Mae CEO Hugh R. Frater, and Freddie Mac CEO Donald H. Layton

Fannie Mae CEO Hugh R. Frater, and Freddie Mac CEO Donald H. Layton

Amid a nationwide housing slowdown, Fannie Mae and Freddie Mac have increasingly backed more home mortgages to Americans steeped in debt.

About 30 percent of loans that Fannie Mae and Freddie Mac packaged into bonds in 2018 went to home buyers whose debt payments totaled 43 percent of their incomes, according to Inside Mortgage Finance, the Wall Street Journal reported. This was double the amount of mortgages the two backed in 2015.

Critics say that this is causing the government to take on more financial risk of borrowers who are more likely to default, while others say that these government entities need to be providing more financial assistance to low-income borrowers.

Fannie and Freddie have backed more of these loans thanks to post crisis rules that tightened mortgage lending requirements. The rules gave an exception known as the “qualified mortgage patch” that temporarily prevented cutting off borrowers’ credit access. This allowed Fannie and Freddie to purchase high debt-to-income mortgages.

The “patch” is expected to end in 2021, preventing Fannie and Freddie from buying loans with debt-to-income ratios above 43 percent, according to the Wall Street Journal.

The Urban Institute, a think tank, projected that an additional 3.3 million mortgages were originated between 2014 and 2018 because of the exception.

This comes about a time when home prices are falling and some government entities are growing concerned with rising risks of nonbank lenders, which are providing many of these residential mortgages.

Federal Housing Finance Agency chief Mark Calabria last month said he is working to re-privatize the two mortgage giants, which were brought under government control in 2008 following the housing market collapse. [WSJ] — Keith Larsen


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