Fannie and Freddie Policy Shift May Ease Mortgage Credit

NEW YORK (TheStreet) -- Fannie Mae  (FNMA) and Freddie Mac  (FMCC) are easing up on the standards that must be met for banks to avoid future legal claims, a move aimed at making it easier for people to get a mortgage.

The government sponsored entities (GSEs) have recovered billions in dollars from banks after requiring them to repurchase bad mortgages.

Under new standards unveiled Monday, mortgages that pass a quality control review will be indemnified from repurchase claims. The review process allows the seller or servicer of the mortgage (a bank, in many cases) to cure deficient loan files and still qualify for the relief. Loans failing the quality control review can still get relief if the borrower pays their mortgage on time for 36 months with no more than two late payments provided no payment is more than 60 days late.

In addition, mortgages on which insurance gets cancelled (known in the industry as recission) will no longer automatically trigger a claim from the GSEs. Instead, the seller of the mortgage will be able to work with Fannie or Freddie on alternatives to repurchase.

FBR Capital Markets analyst Ed Mills argued in a report Tuesday that recissions "should be less of an issue going forward, as the mortgage insurance industry has been moving towards clarity of coverage arrangements that limit rescissions."

Mills argues the policy shift "should help remove one of the largest overhangs" on the housing recovery.

But Anthony Sanders, a finance professor at George Mason University, believes lenders should "remain fearful" about litigation.

"I were lenders, I would seek indemnification from the Department of Justice and the Consumer Financial Protection Bureau against litigation if foreclosures increase again," he wrote Tuesday on his blog, Confounded Interest.

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