Mortgage regulator faces balancing act

WASHINGTON — The takeover of Fannie Mae and Freddie Mac places enormous power in the hands of a new regulator, which must balance pressure to stem foreclosures and aid the ailing housing market with the need to reduce taxpayers' final bill.

The Federal Housing Finance Agency is now firmly in control of the two mortgage finance companies, which own or guarantee about $5 trillion in home loans, about half the nation's total.

Created over the summer, the agency now has a direct hand in overseeing the companies' activities. It replaced the companies' board of directors under a process known as a conservatorship.

FHFA, for example, has the power to deflate the financial parachutes of the companies' outgoing top executives and set the salaries of its new ones. James Lockhart, FHFA's director, said Sunday that the new leaders' pay will be "significantly lower than the outgoing CEOs."

Though the government has shut down Fannie and Freddie's sizable lobbying operations, lawmakers and influential real estate groups will likely hammer on the agency to reshape the mortgage companies' role in the market.

Real estate agents, mortgage brokers and homebuilders, for example, are expected to lobby FHFA to roll back fees and ease lending criteria that Fannie and Freddie put in place this year to stem losses on defaults and foreclosures.

"The faster and more energetically (Fannie and Freddie) are in the game, the faster the anticipated bottom of the housing market can be reached," said Jerry Howard, chief executive of the National Association of Home Builders. "The more they squeeze, the more pain is felt through the entire industry."

Fannie and Freddie, for example, have hiked fees for borrowers without sterling credit, while asking for bigger down payments.

"Their underwriting is so tight now, it's going to stifle any demand that would normally be in the marketplace," said Guy Cecala, publisher of Bethesda, Md. -based trade publication Inside Mortgage Finance.

However, if the agency allows the companies' lending standards to slip too far, they risk worsening their financial problems and putting taxpayers on the hook.

Government officials, along with Fannie and Freddie's executives "have a very full appreciation right now of how much damage can be done with imprudent lending," said Douglas Elmendorf, a senior fellow at the Brookings Institution.

Consumer advocates and some Democrats are starting to call for Fannie and Freddie to help more borrowers facing foreclosure by modifying more loans.