Moving to defuse a potentially explosive issue before next week's convention of the Mortgage Bankers Association, Fannie Mae said it would sharply reduce requests that lenders buy back problem loans.
These include nonperforming affordable-housing loans as well as other loans that, though still current, may be headed for trouble. Fannie Mae, formally the Federal National Mortgage Association, said it was working to eventually eliminate such requests.
"We are collectively learning about how to do affordable housing lending and applying the lessons we've learned," said a Fannie Mae spokesman, David Jeffers. Fannie wants to avoid penalizing lenders for the early years of experimenting, he added.
Late payments on loans made to low- and moderate-income borrowers through special programs have soared to as much as twice the level of traditional loans by some accounts, rendering the loans particularly vulnerable to repurchase requests from the agencies.
When lenders sell loans to Fannie Mae or Freddie Mac, the Federal Home Loan Mortgage Corp., they are generally no longer exposed to credit risk. But under some conditions, such as fraud or ineligibility, the agencies can ask lenders to buy back the loans. Buying back a loan can be costly to lenders because they must then resell it, and possibly suffer a loss.
Fannie Mae's relaxed policy will apply to any affordable-housing loans made since 1991 as long as eligible loans did not default in their first two years or involve fraud.
Mortgage bankers quickly hailed Fannie's move as a victory for their tough new stance with the mortgage agency and its smaller counterpart, Freddie Mac, on the increase in repurchase requests.
"We've had face-to-face, eyeball-to-eyeball meetings with the top leadership at Fannie and Freddie, and this is Fannie Mae's positive response to some concerns we expressed," said Paul S. Reid, the outgoing president of the Mortgage Bankers Association and chief executive of American Home Funding Inc., Richmond, Va.
"It doesn't solve all the problems, (but) we applaud what they've done," Mr. Reid said.
In recent meetings with Fannie Chairman James A. Johnson and his top managers, and separately at dinner with Freddie's chairman, Leland Brendsel, at Washington's plush Occidental Grill, Mr. Reid and Ron J. McCord, the trade group's incoming president, told the executives that lenders feel Fannie and Freddie are shirking their responsibility by asking lenders to buy too many of the problem affordable-housing loans of recent years.
Both agencies are under congressional mandate to finance more housing for low- and moderate-income borrowers, and have responded by loosening credit standards for these targeted buyers. Mortgage bankers say the looser standards are the reason for the poor performance of the loans Fannie and Freddie want them to buy back, rather than sloppiness on their part.
Through its announcement Wednesday, Fannie appeared to agree, or at least signaled that it wants bygones to be bygones.
In a press release, Mr. Johnson said he wants to eliminate altogether the risk of loan buybacks by encouraging lenders to use Fannie's automated underwriting system. Loans that are approved through the system and sold to Fannie Mae may not be sold back by Fannie to lenders.
Fannie Mae said it would waive fees when lenders use the system to approve affordable-housing loans.
Addressing another concern on this front, Fannie Mae said it would discontinue buyback requests on performing loans from lenders who have demonstrated "financial strength and quality."
Such requests have been particularly contentious at Freddie Mac. Mortgage bankers complain that Freddie uses newly implemented scoring models to target low-score loans for repurchase, even when the loans are still performing. Both current and seasoned loans - made before the scoring technique was used by Freddie - have been targeted for such buybacks, Mortgage Bankers Association executives said.
At Freddie Mac, Michael Stamper, executive vice president of risk management, categorically denied the agency has asked lenders to buy back seasoned performing loans.
As for newly originated loans, Mr. Stamper said the agency does use scoring models to select the riskiest loans for human review. For lenders with a good record, the agency has substantially the same policy as Fannie's new policy, he said.
Those lenders are not required to repurchase the loans. If the loans go bad, Freddie checks for "egregious" underwriting problems, which would trigger a repurchase, Mr. Stamper said.
