The federal regulator of Fannie Mae and Freddie Mac on Wednesday proposed an overhaul of rules governing how the mortgage funding giants serve low-income homeowners while limiting their risks.
The Federal Housing Finance Agency for 2010 and 2011 said it is planning goals for single-family home purchases for low income families, very low-income families and families in low-income, high minority and disaster areas.
But in a twist from past practices, the rules would prohibit Fannie Mae and Freddie Mac -- the two biggest sources of U.S. housing finance -- from using investments in Wall Street's mortgage securities to satisfy the goals.
The companies during the housing boom had to stretch to meet affordable housing goals, which lowered their standards, James Lockhart, the former head of the FHFA, said this month. Fannie Mae and Freddie Mac executives were also pushed to be more aggressive by equity investors, without any checks from debt holders who felt protected by an implicit government guarantee, he said.
The government seized control of Fannie Mae and Freddie Mac in September 2008 after losses threatened the companies' ability to stabilize a faltering housing market. Since then, the companies have required some $111 billion in support from the U.S. Treasury and have said they would need more as they administer government foreclosure prevention efforts.
FHFA does not intend for the enterprises to undertake uneconomic or high-risk activities in support of the goals, nor does it intend for the enterprises' state of conservatorship to be a justification for withdrawing support from these market segments, the FHFA said in a statement.
Affordable housing goals were previously set by the U.S. Department of Housing and Urban Development.
In addition to benchmark goals, Fannie Mae and Freddie Mac may also use a market-based alternative measure to meet their goals, the FHFA said.
Lockhart made his comments at a meeting of the American Securitization Forum in Washington, where investors and Wall Street dealers were discussing ways to restart the private mortgage bond market. More private credit is key to supporting housing as the government weans markets from its emergency supports, analysts said.
(Reporting by Al Yoon; Editing by James Dalgleish)