The new head of the government agency that oversees Fannie Mae and Freddie Mac laid out a new game plan Tuesday -- a change in direction, designed to get banks to lend more. The way it works now, Fannie and Freddie buy mortgages from banks and guarantee them. But Fannie and Freddie make banks buy them back if there’s a problem, even if it’s just a minor paperwork glitch.
Now, Fannie and Freddie will ease up. Carefully.
“Since any stumbles along the way could have ripple effects in the $10 trillion housing finance market, there’s a lot at stake in getting this right," says Mel Watt, the new director of the Federal Housing Finance Agency.
If Watt gets it right, analysts say banks will be more willing to lend to first time or low-income homebuyers. That's because they won’t be so worried about having to buy their loans back. Will Watt’s plan be enough to rev up the housing market, which has been limping along in second gear?
“Well I think it’s going to stop us from going in reverse,” says Tim Rood, a former executive at Fannie Mae, now chairman of the Collingwood Group.
But if the housing market speeds up too fast, will it overheat? Not a chance, says Guy Cecala, publisher of Inside Mortgage Finance.
“We’re still nowhere near the speed limit," he says. "If the speed limit is 65, we’re still going along at 45, but it’s better than 30 or wherever we were at before."
Cecala says, even with Watt’s changes, banks will still be cautious.