Magazine article American Banker


Magazine article American Banker


Article excerpt

Byline: Allison Bisbey Colter and Kate Berry

GSE Hindsight

Increased powers to oversee Fannie Mae and Freddie Mac came too late to avoid their takeover, said James B. Lockhart, the director of Federal Housing Finance Agency.

In 2006 and 2007, before the agency was created, Fannie and Freddie bought or guaranteed many more low-documentation, low-verification, and nonstandard adjustable-rate mortgages than they had in the past without commensurate risk pricing, Mr. Lockhart said in congressional testimony Tuesday.

For example, he said, in the first half of last year alternative-A loans, interest-only or option ARMs, and mortgages with multiple risk characteristics made up roughly a third of the government-sponsored enterprises' new business, versus 14% in 2005.

Once market conditions deteriorated, Fannie and Freddie may have raised prices and tightened credit standards "beyond what was necessary for sound underwriting" to build capital, Mr. Lockhart said.

The Housing and Economic Recovery Act, enacted July 30, authorized the creation of a new GSE regulator with additional powers to set capital requirements and establish prudential safety-and-soundness standards.

"I am very grateful that Congress granted those authorities to FHFA, but regrettably they arrived too late to establish a strong capital regime in advance of this credit cycle," Mr. Lockhart said. He said he has instructed Fannie and Freddie's new chief executives to examine their underwriting standards and pricing. …

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