NEW YORK: Sept 22: Just four years after toxic US mortgages brought the global financial system to its knees and triggered the deepest recession since the Great Depression, a US housing regulator may be making it easier for banks to make bad loans without suffering losses.

The Federal Housing Finance Agency released a little-noticed rule last week that makes it harder for Fannie Mae and Freddie Mac - the government-owned companies that guarantee home loans made by banks - to hold lenders accountable when mortgages go bad.

Some experts said the new rules show that lessons of the housing crisis are already being forgotten, and could set up taxpayers for tens of billions of dollars of losses if the lending bubble re-inflates later in the credit cycle.

At issue is when Fannie Mae and Freddie Mac can press banks to make them whole when mortgages go bad. Under the current rules, the two US government-backed companies can push banks to buy back mortgages that were fraudulent, or not properly underwritten.

Under the new regulations, starting with loans sold to Fannie Mae and Freddie Mac in January, if the borrower makes payments for 36 consecutive months, banks cannot be asked to buy them back due to underwriting or appraisal problems.

So if the borrower did not have enough income to qualify for a loan to begin with but Fannie Mae or Freddie Mac did not notice for three years, the bank could not be pressed to buy back the loan.

For new loans, the bank can still be pushed to buy back the loan for reasons such as fraud or errors in submitting data. The new rules do not apply to existing loans.

The upshot of the rules is that Fannie Mae and Freddie Mac must check more loans early in their lives to avoid problems later.

“These regulations assume we’ll never get another mortgage crisis,” said Joseph Mason, a professor at Louisiana State University’s business school who specialises in structured finance.

If there is another mortgage crisis, Fannie Mae and Freddie Mac could lose even more than they did this time around, he added.

A former senior executive at one of the two companies found the regulations nettlesome. “It’s easier for banks to give you (Fannie Mae or Freddie Mac) bad loans with these new rules,” he said. Just how many repurchase requests result from underwriting problems is unclear. The FHFA last week said that past repurchase requests issued by Fannie Mae and Freddie Mac were triggered by “substantive underwriting and documentation deficiencies,” but the agency declined to provide details.

Fannie Mae and Freddie Mac currently have about $17.5 billion of repurchase requests outstanding, which they attribute largely to loans made at the height of the housing bubble from 2005 to 2008. The two companies are still making requests for banks to buy them back, and the requests take time to resolve.

The FHFA, which regulates Fannie Mae and Freddie Mac, believes lending has contracted too much and has said it’s trying to encourage home loans by giving banks more certainty about when they will have to buy back soured loans that they sold to the two finance companies.—Reuters