Housing is struggling, and mortgages are increasingly out of reach for many homebuyers. The possible connection between these two conditions has not gone unnoticed by the Federal Housing Finance Agency, regulator of mortgage heavies Fannie Mae (FNMA -0.79%) and Freddie Mac (FMCC -0.92%), and changes are on tap to alleviate the problem – by making mortgages more available to those with dodgy credit.

Mortgage buybacks have made banks skittish
At the heart of the problem is the understandable reluctance of lending banks to revisit the era of mortgage buybacks. In the years following the subprime mortgage meltdown, banks like Bank of America were required to repurchase great swaths of these shoddy loans from Fannie and Freddie, finally paying out billions in settlements to each entity in order to put the whole issue to bed permanently.

Since then, mortgage rules have tightened considerably. Now, Fannie and Freddie will only buy mortgages that fit the new "qualified mortgage" standards, which lean heavily toward making certain that borrowers can truly repay the loan. Lenders, still jittery from the subprime crisis, have layered extra requirements for borrowers on top of qualified mortgage criteria – causing mortgage-making to slow to a crawl.

Are the new rules too lenient?
In an effort to loosen things up in the mortgage market, the FHFA, Fannie, Freddie, and mortgage lenders have negotiated a new set of less-onerous rules for lenders. Some of the changes announced by FHFA chief Mel Watt at a recent meeting of the Mortgage Bankers Association include dropping from 5% to 3% the required down payment on some loans destined for sale to Fannie or Freddie. To allay lenders' fears regarding buybacks, specific criteria has been established to identify fraud in mortgage loans, including issues like data errors, misrepresentations, and title issues. A resolution process for disputes between the housing agencies and lenders regarding buybacks is also in the works.

The hope is that banks and other mortgage lenders will extend credit to a wider population of borrowers, some of whom may have less-than-stellar credit. Currently, most loans purchased by Fannie and Freddie have borrower credit scores around 742 – though both agencies accept scores as low as 620, the limit below which a borrower is considered subprime.

Is the mortgage industry inching toward a return to risky lending practices? Perhaps not. There seems to be quite a lot of wiggle room in the above credit scores for banks to expand the definition of a "safe" borrower. Even loans with scores below 660 are performing better these days, with mortgages written since 2012 showing fewer delinquencies than earlier loans, according to a recent report from Black Knight.

In addition, instituting the 3% down payment rule would bring Fannie and Freddie in-line with the Federal Housing Administration's own 3% down payment criteria. Just like other borrowers who put down less than 20%, these buyers would be required to purchase private mortgage insurance, as well.

Ultimately, the housing recovery may depend more upon the movement of interest rates than any other variable. Housing affordability is at a very low point, according to analysts at Bank of America Merrill Lynch, and changing these rules probably won't increase mortgage business for lenders above 4% next year. The factor that would have the most positive effect on housing would be a drop in interest rates to around 3%.

But, low rates won't be around forever, and that may be what regulators and lenders are concerned about: how to spur more mortgage-lending once rates begin to rise in earnest. Pushing the concept of home ownership can be a slippery slope, however, as the housing crisis clearly showed. As regulators and lenders begin to peel away the restrictions on mortgage lending, the memories of the recent past will, hopefully, keep them from going too far, too fast.