Subprime Market Seeing Greater Regulations

Politicians and mortgage buyers intensified their focus on the subprime mortgage market last week, indicating greater regulation of the troubled industry.

The country’s two major mortgage buyers, Fannie Mae and Freddie Mac, announced on Friday they would implement tougher standards this fall on the mortgages they buy to follow guidelines released by federal banking regulators last October.

The two mortgage giants announced that beginning Sept. 13 they would purchase mortgages using the “Interagency Guidance on Nontraditional Mortgage Product Risks” issued by the Federal Financial Institutions Examination Council (FFIEC). The guidance focuses on mortgage programs that offer such plans as no down payment, interest-only, and adjustable rates that are not fully amortized, or may not be paid off at the end of the loan period.

Fannie Mae and Freddie Mac buy mortgages, package them, and resell them as securities. The two hold about $1.4 trillion in mortgages, according to MarketWatch.com.

In June, the FFIEC issued guidance covering subprime mortgage products that aren’t covered by the nontraditional mortgage products guidance. The subprime guidance addressed mortgages that typically are fully amortized, or paid off at the end of the loan period. Fannie and Freddie have indicated they plan to implement programs to address subprime mortgages.

The FFIEC includes the five major federal banking regulators: the Federal Reserve, the Office of Thrift Supervision, the Federal Deposit Insurance Corp., the National Credit Union Administration and the Office of the Comptroller of the Currency.

On Thursday, Rep. Spencer Bacchus introduced a measure that would create a national registry and licensing standards for mortgage brokers. Bacchus, a Republican from Alabama, is the ranking minority member of the House Financial Services Committee.

The Bacchus bill would require mortgage lenders to review closely the borrower’s ability to repay their loan and limit penalties on borrowers that refinance out of a high-priced loan.