Fannie and Freddie Mac act over sub-prime crisis

Poor Americans struggling to keep up their mortgage payments will be offered new loans with more relaxed rules, in an effort to head off a wave of repossessions.

The government-backed companies charged with keeping the US mortgage market on an even keel told Congress yesterday they would respond to the sub-prime mortgage crisis by loosening credit rules.

Many investors and economists have expressed concern that a rise in mortgage arrears and repossessions could trigger a wider consumer downturn, and perhaps even tip the US economy into recession.

And the issue has been rising up the political agenda, too, with growing calls for a government bail-out for homeowners facing difficulties, and for new rules to curb unscrupulous practices in lending.

The House financial services committee took evidence from consumer groups and representatives of the mortgage industry, including from the chief executives of Fannie Mae and Freddie Mac, the government-sponsored enterprises set up to stimulate home ownership. Primary lenders such as banks are confident enough to offer mortgages because they are able to sell the debt on to Fannie Mae or Freddie Mac.

The chief executives said that, by changing their own criteria for the sub-prime loans they would be willing to buy, the two companies could encourage banks to allow struggling homeowners to refinance their mortgages, rather than foreclosing.

Many Americans on low incomes or with poor credit records - so-called "sub-prime" borrowers - have been tempted on to the housing ladder with cheap introductory interest rates that will soon reset to much higher, variable rates, said David Mudd, Fannie Mae's chief executive. They should be encouraged to switch to alternative loans with fixed rates, even if the length of the mortgage term has to be extended to 40 years.

"The best way to influence the sub-prime market, and be part of the solution, is to stay engaged and provide funding for conventional loans to these borrowers that are affordable over the long term," Mr Mudd said.

Last week a group of senators led by New York Democrat Charles Schumer proposed a government bailout for sub-prime borrowers facing foreclosure, but Freddie Mac's chief executive Richard Syron yesterday warned lawmakers off such a plan. It could have "lasting, unintended consequences that harm the housing finance system in the long term," he said. "The ability to enforce a mortgage contract, including the use of foreclosure, is critical to continued investor confidence in the US housing market."