Saying Fannie Mae and Freddie Mac should be allowed to play a greater role in helping troubled subprime borrowers, Sen. Charles Schumer Monday announced legislation that would authorize the government-sponsored entities to buy an additional $145 billion in mortgages.
Schumer, D-N.Y., said Fannie and Freddie would be required to use half the authorization to refinance adjustable-rate mortgages with interest rates scheduled to reset between June 2005 and December 2009.
The authorization — which would be accomplished by temporarily raising the $1.4 trillion cap on the GSEs’ loan portfolios by 10 percent — would help only borrowers who are able to meet Fannie and Freddie’s underwriting standards.
Schumer’s bill, the Protecting Access to Safe Mortgages Act, is aimed at helping the 40 percent of subprime borrowers who could have qualified for prime loans, but who ended up with riskier loans because they were taken advantage of by mortgage brokers, he said.
“We’re not bailing anybody out,” Schumer said in a conference call with reporters. “These are people who, if there was a bank on the scene, would get refinancing.”
Wall Street investors have stopped buying many securities backed by mortgage loans, making Fannie and Freddie “the only games in town right now” in providing liquidity to the secondary mortgage market, Schumer said.
“That is the tragedy here,” Schumer said. “So many of these people don’t have to lose their homes, but there’s nobody on the scene” to loan them money.
The bill would also raise the conforming loan limit in 11 high-cost areas from $417,000 to the median home price or $626,000, whichever is less, he said.
The Bush administration has opposed lifting caps that limit the total value of mortgage loans the GSEs can purchase and hold for investment until Congress approves legislation reforming oversight of Fannie and Freddie, which are trying to put management and accounting scandals behind them.
In the meantime, Bush administration officials say, Fannie and Freddie have fewer restrictions on their guarantee and securitization businesses, the process through which the GSEs sell bundles of loans to investors.
In a Sept. 6 letter to Schumer, federal regulators who oversee Fannie and Freddie said the portfolio caps are not stopping the GSEs from helping troubled subprime borrowers.
“Both Enterprises (Fannie and Feddie) have regular and special programs that may provide attractive alternatives for some subprime borrowers exposed to payment shock,” said James Lockhart, director of the Office of Federal Housing Enterprise Oversight, in a letter to Schumer. “Most new refinance loans of such borrowers can be securitized in the normal course of business. The portfolio caps are not hindering either Enterprise’s ability to help in this area.”
But Schumer insists that the fastest way to provide relief to troubled borrowers is to allow the GSEs to buy more loans to hold in their own portfolios.
“It’s not at all certain that if Fannie and Freddie bought these (loans), they could sell them,” Schumer said.
With a GSE reform bill deadlocked in the Senate, Schumer said his bill is intended to provide temporary relief. If passed, the increased portfolio cap and conforming loan limits would expire after one year.
The Bush administration has launched its own initiative to provide relief for subprime borrowers, allowing the Federal Housing Administration to back refinance loans for borrowers who are already in default. While the Bush administration says the FHA could help up to 700,000 troubled borrowers in the next two years, Schumer said Fannie and Freddie can provide more liquidity.
Schumer estimated that the FHA will be able to guarantee only about $20 billion in refinance loans, or less than one third of the $72.5 billion in refinance loan purchases Fannie and Freddie would be expected to make through his proposal.
Schumer said that he has not heard whether two influential Democrats who have been outspoken about the recent troubles in the mortgage lending industry — Sen. Chris Dodd, D-Conn, and Rep. Barney Frank, D-N.Y. — will support his bill.
Both have said Fannie and Freddie should play a bigger role, but neither has signed off on the bill, Schumer said.
Earlier this year, Schumer introduced a bill aimed at curbing predatory lending, The Borrower’s Protection Act of 2007, which would establish a fiduciary duty for mortgage brokers and originators and create a “faith and fair dealing” standard for all originators.
Schumer’s bill was promptly referred to the Senate Banking Committee where it awaits a hearing. Last week Dodd, who chairs the committee and is running for president, said he will introduce his own bill with similar restrictions on lenders.