Government regulators are giving mortgage repurchasers Fannie Mae and Freddie Mac leeway to buy or securitize an additional $40 billion in home loans during the next six months — less than increases sought by the GSEs and some lawmakers.
Those who say Fannie and Freddie can play a greater role in providing relief to troubled borrowers have called on the Office of Federal Housing Enterprise Oversight (OFHEO) to raise caps on the dollar value of loans the government-sponsored entities (GSEs) are allowed to hold in their portfolios.
The portfolio caps, established in the wake of accounting and management scandals at Fannie and Freddie, limit their portfolios to a combined $1.46 trillion.
The Bush administration has said it won’t consider raising the portfolio caps — or a $417,000 limit on the size of individual loans eligible for repurchase — until Congress passes a GSE reform bill strengthening oversight of Fannie and Freddie.
OFHEO said Wednesday it will allow Fannie and Freddie to change the way they measure their portfolios, and bump the caps as calculated using the new measurement by a combined $14.2 billion. Both GSEs will be allowed to grow their portfolios at 2 percent a year, a capability previously granted only to Freddie Mac.
The GSEs will be allowed to measure their portfolios using unpaid principle balance (UPB), rather than more complex generally accepted accounting principles (GAAP). OFHEO is adjusting the UPB cap for both Fannie and Freddie to $735 billion as of July 1, instead of $728.1 billion for Freddie and $727.7 billion for Fannie using GAAP.
In the next six months, the portfolio cap flexibility — along with Fannie and Freddie’s existing ability to securitize mortgages and sell assets — will give each the ability to purchase or securitize an additional $20 billion in subprime mortgages, refinanced mortgages for borrowers with lower credit scores, and affordable multifamily housing mortgages, OFHEO said.
The new policy “should allow them to provide greater assistance to subprime borrowers and others who may have difficulty refinancing their existing mortgages in the current environment,” said OFHEO director James Lockhart in a press release.
OFHEO said larger increases in the portfolio caps “would not be prudent” because the GSEs are still working to correct problems uncovered during the accounting and management scandals, and “many safety and soundness issues are not yet resolved.”
“OFHEO continues to believe that a more permanent solution to the portfolio limit question requires both congressional guidance and strengthened supervisory authorities,” Lockhart said.
In the mean time, OFHEO has not limited Fannie and Freddie’s ability to guarantee mortgages for securitization and sale in the secondary market.
But some lawmakers say larger increases in the loan portfolio caps are needed to allow Fannie and Freddie to buy more loans from mortgage originators and hold them in its investment portfolio.
On Sept. 10, Sen. Charles Schumer, D-N.Y., announced a bill that would raise the portfolio caps by 10 percent, and raise the conforming loan limit in 11 high-cost areas to the lesser of the median home price or $626,000. Schumer said the bill would allow Fannie and Freddie to purchase an additional $145 billion in mortgages.
In a statement today, Schumer said the OFHEO’s rule change “doesn’t respect the magnitude of this crisis.”
Fannie and Freddie issued statements saying that although they plan to use the additional purchasing capacity granted by OFHEO, the new policy doesn’t go far enough.
Freddie Mac spokesman David Palombi said the decision announced by OFHEO today ratifies a commitment the company made in April to purchase up to $20 billion in “consumer-friendly” mortgages.
“We believe, however, that more should be done at this moment to help alleviate the current mortgage credit crunch,” Palombi said, including a broader lifting of the portfolio caps and a temporary increases in the $417,000 conforming loans limit.
Such action would allow Freddie Mac to “provide a much-needed backstop bid for mortgages” and provide liquidity to a segment of the jumbo market where money has become much more expensive relative to the conforming market, he said. “In high-cost areas in particular, this might prevent declines in home prices that could lead to additional defaults,” Palombi said.
Fannie spokesman Brian Faith said OFHEO’s decision is “directionally helpful,” as it provides “some limited flexibility.” But Faith restated the company’s past call for a 10 percent increase in the portfolio cap “so that we can more fully address the ongoing turmoil and bring much-needed liquidity to the mortgage market.”
Faith said Fannie Mae continues to help borrowers most in need and “will use the flexibility provided under OFHEO’s new cap formula.”