FDIC's Bair warns of government exposure in mortgages

A key U.S. banking regulator raised concern on Wednesday about the risk of exposure the government is taking on in the mortgage market and urged more stringent standards for underwriting mortgages.

We should all be concerned about the type of exposure that the government is taking on through guaranteeing so many mortgages right now and make sure that we do have some prudent underwriting standards, Federal Deposit Insurance Corp Chairman Sheila Bair suggested in an interview on CNBC.

The government is taking on a lot of exposure and guaranteeing most mortgages that are being originated these days, she said. And I think the policymakers here are trying to balance the need for prudent underwriting with a need to support... what is still a very distressed housing market.

Mortgage finance giants Fannie Mae and Freddie Mac, under government control since September 2008, and the Federal Housing Administration, currently back some 90 percent of new U.S. mortgages.

Treasury Secretary Timothy Geithner said last month the U.S. government's role in housing finance should undergo fundamental change, but that it should still provide some guarantees in the $10.7 trillion mortgage market.

In the interview, Bair said the Federal Reserve's rules were more focused on higher-cost loans and that the sweeping regulatory reforms President Barack Obama signed into law incorporated some good standards.

But I think we can do a better job of having consistent, strong lending standards across the board for both bank and nonbank mortgage originators, Bair said.

She suggested tighter standards should include very robust income documentation, ability to repay standard loans and a significant down payment.

Clearly there is a strong correlation between the amount of skin in the game a borrower puts in up front and how that loan performs, Bair said. Do you put 20 percent down? You're committed to that house. You walk away from that house, you're going to lose a lot of the money that you put in up front.

(Writing by Joanne Allen; Editing by Kim Coghill)