Mortgage repurchasers Fannie Mae and Freddie Mac should be allowed to play a greater role in easing the mortgage lending credit crunch, say lawmakers who want to raise the conforming loan limit and lift caps on Fannie and Freddie’s loan portfolios.
Rep. Barney Frank, chairman of the House Financial Services Committee, said a bill passed by the House this spring overhauling oversight of the government-sponsored entities, or GSEs, should have gone farther in raising the conforming loan limit — the maximum-size loan Fannie and Freddie normally purchase or guarantee.
A bill the House sent to the Senate in May, HR 1427, would leave the conforming loan limit at $417,000, but allow Fannie and Freddie to securitize and sell loans up to 150 percent over the limit in areas where the median home price exceeds the limit.
As envisioned by the House, Fannie and Freddie would be able to fund loans of up to $625,000 in the highest-cost areas — meaning buyers could take advantage of the lower rates on GSE loans on homes priced at up to $780,000, if they were able to make a 20 percent down payment.
That would put the GSEs in competition with private lenders who make jumbo loans. Rates on jumbo loans have shot up in recent weeks because Wall Street investors have gotten jittery about investing in all but the safest mortgage-backed securities.
In a statement issued after House passage of the GSE reform bill, the Treasury Department said it was “troubled” by the provisions relating to conforming loan limits, and a proposal to tax Fannie and Freddie to create an affordable housing fund. But Frank now says the House bill didn’t go far enough.
“It now is clear we underestimated in the House bill how far we should raise the conforming loan limit, and the current crises in the mortgage market demonstrate we should raise it to a higher level,” Frank said in a statement. “I urge the Senate to make this a priority as part of GSE reform, because we now have the opportunity to help homeowners get access to needed credit by allowing Fannie Mae and Freddie Mac to play a larger role.”
Rep. Gary Miller, R-Calif., joined Frank in urging the Senate to raise the conforming loan limit in its version of the bill.
“In the current housing crisis, it is clear that we must immediately provide additional mortgage liquidity in all areas of the country, including high-cost areas,” Miller said in the statement.
Caps on Fannie and Freddie’s lending portfolios are another issue of contention between the Bush administration and some influential lawmakers.
In the wake of accounting and management scandals at the GSEs, Freddie volunteered to limit the growth of its loan portfolio to 0.5 percent per quarter, from a mid-2006 baseline of $710.3 billion. Fannie’s mortgage portfolio assets were capped at $727.7 billion, under the terms of a May 2006 consent order.
Democratic lawmakers and industry groups including the National Association of Realtors have asked federal regulators to consider raising the caps on the GSEs’ lending portfolios. In theory, raising the caps would allow Fannie and Freddie to buy up more conforming loans from lenders, freeing up money to make more loans.
So far, the Bush administration, through the Office of Federal Housing Enterprise Oversight, has resisted such calls. In an Aug. 10 letter, OFHEO Director James Lockhart said regulators still have “significant supervisory concerns” about the GSEs.
Loosening the caps would do little to improve liquidity in the secondary markets for subprime and Alt-A mortgage loans, Lockhart said, because Fannie and Freddie have traditionally repurchased prime, conventional conforming loans, which are not in short supply.
Interest rates on prime mortgage loans have actually declined at times in recent weeks, because of the slowdown in housing sales and ample funding for loans that carry less risk.
Fannie Mae announced today it will not issue a benchmark note offering in August, the first time since May 2006 it has exercised its right to skip a monthly offering.
But some lawmakers continue to see the issue of portfolio caps as a potential roadblock in turning around slumping housing markets.
Sen. Charles Schumer, D-N.Y., now says he will sponsor legislation to lift the caps if OFHEO doesn’t act by the time Congress reconvenes in early September.
“We cannot afford a ‘wait and see’ approach when it comes to a credit crisis that threatens to derail our economy,” Schumer said in a statement. “The Bush administration continues to ignore one tell-tale sign after another that the subprime woes are threatening the broader mortgage markets. Fannie and Freddie are uniquely positioned to inject badly needed liquidity into the economy, but (President Bush) won’t let them do their job.”
Bush, when asked about a larger role for Fannie and Freddie at an Aug. 9 press conference, said he would only consider such moves after Congress passes a GSE reform bill.