The credit crunch for American homebuyers is unlikely to loosen anytime soon

It has been hard for US homebuyers to get a mortgage lately, but there are signs that this might change. Eventually.

Banks will have less reason to fear the that the government will demand they buy back loans that go sour, the country’s top housing finance official announced yesterday.

Absent misrepresentations or lapses in legal title, officials won’t force lenders to repurchase dud loans that they sell to mortgage-finance giants Fannie Mae and Freddie Mac, which between them guarantee two-thirds of US home loans. That’s according to Mel Watt, the director of the Federal Housing Finance Agency, who was speaking at a meeting for bankers in Las Vegas.

“We know that this issue has contributed to lenders imposing credit overlays that drive up the cost of lending,” Watt said, according to a prepared text of his speech. The so-called overlays also “restrict lending to borrowers with less than perfect credit scores or with less conventional financial situations,” he added.

The clarification, which comes amid a push by regulators to spur lending, sounds like deja vu all over again to some analysts.

Though the government made a move two years ago to mollify lenders who feared the prospect of buybacks, “a detailed reading of the guidelines revealed that multiple exceptions rendered most waivers meaningless,” analysts Jasraj Vaidya and Harkaran Talwar of Barclays wrote in a recent research note.

Buyers who might qualify for a loan under revised guidelines qualify for a loan already, according to Credit Suisse. The moves “could help housing on the margin but likely won’t result in substantial re-acceleration,” Michael Dahl and fellow analysts wrote in a note published today.

Wells Fargo, the largest US originator of mortgage loans, said recently that it has started to ease off on the so-called overlays that filter out borrowers based solely on their credit scores. “We have started to reduce a little bit of those as we start to understand more about repurchase,” John Stumpf, Wells Fargo’s CEO, told analysts on a call to discuss the bank’s latest quarterly results.

Wells Fargo, JPMorgan Chase, Bank of America and Citigroup all lent more money to homebuyers in the third quarter than in the quarter that preceded it. This will please Watt, a former congressman, who has pushed consistently for more mortgage lending. But although banks have been lending to borrowers with slightly lower credit scores recently, credit is still pretty tight and lower-rated mortgages “remain absent” from the pools of loans the government buys from lenders, according to the Barclays analysts.

Whether the moves by Watt achieve their goal also may depend on a pickup in the housing market, which has weakened this year. “We believe the effect of these changes will take several quarters to be felt,” JPMorgan’s Michael Rehaut, Jason Marcus and William Wong said in a report. “Various credit overlays will likely remain for the time being and only be reduced gradually as the mortgage and housing markets continue their slow recovery.”

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