Industry groups push to raise caps on GSEs' loan portfolios

Trade groups representing realtors, builders and mortgage lenders Monday urged federal regulators to temporarily increase caps on the loan portfolios of mortgage repurchasers Fannie Mae and Freddie Mac.

“The nation’s mortgage markets are facing a liquidity crisis of a force and magnitude not seen in decades,” the groups said in a letter to James Lockhart, director of the Office of Federal Housing Enterprise Oversight, or OFHEO. “The chill will have far-reaching effects throughout the housing market if stability is not restored. A temporary increase in the allowable size of the GSEs’ loan portfolios for the purpose of easing this credit crunch would help stem the crisis.”

Democratic lawmakers have made similar requests of OFHEO, and Fannie Mae Chief Executive Officer Daniel Mudd has asked for the cap on Fannie’s portfolio to be raised by 10 percent.

Limits on the loans the government-sponsored entities (GSEs) are allowed to hold in their portfolios were put in place following management and accounting scandals. President Bush has said Congress must first approve legislation overhauling oversight of Fannie and Freddie before he will consider loosened restrictions on their lending activities.

In an Aug. 10 letter to Sen. Charles Schumer, D-N.Y., Lockhart said “significant supervisory concerns” remain in regards to Fannie and Freddie’s operations. While OFHEO was keeping Fannie’s request for an increased portfolio cap “under active consideration,” it was not ready to authorize changes yet, Lockhart said.

Fannie and Freddie have traditionally repurchased prime, conventional conforming loans, which are not in short supply, and loosening the GSEs’ portfolio caps would do little to solve the liquidity issues that have roiled the subprime and Alt-A markets, Lockhart said.

But the three housing industry trade groups asking Lockhart to reconsider that decision — the National Association of Realtors, the National Association of Homebuilders and the Mortgage Bankers Association — said Fannie and Freddie can be of assistance, and that the situation is too urgent to wait for Congress to pass GSE reform legislation.

Although the House of Representative in May passed legislation that would create a new independent regulator for Fannie and Freddie, the issue of portfolio caps helped kill a similar bill in the Senate last year.

“We support GSE reform and we particularly appreciate your efforts and those of Congress to enact GSE reform legislation,” the trade groups told Lockhart. “Nonetheless, considering the stakes involved for the housing finance system, we do not believe the development of the initiatives suggested above can wait for enactment of legislation.”

The groups said an increase in the portfolio caps could be “appropriately targeted” to so that the GSEs’ increased lending capacity is used to meet “the most urgent credit needs.” That includes the private-label mortgage-backed securities (MBS) market and mortgages for “creditworthy” families who “would otherwise find it difficult or impossible to obtain a loan,” the groups said.

OFHEO could impose conditions including the size of the increase, the types of assets eligible for purchase, appropriate reporting and monitoring provisions, and a reasonable schedule for returning to the current limits, the groups said.

Under the terms of a May 2006 consent order, Fannie’s mortgage portfolio assets were capped at $727.7 billion, while Freddie is operating under voluntary growth limits on its portfolio of 0.5 percent per quarter from a mid-2006 baseline of $710.3 billion until it resumes regular financial reporting.

Lockhart noted that Fannie and Freddie have no cap on their securitization and guarantee activities, which currently total about $3 trillion.