The Bush administration will consider allowing Fannie Mae and Freddie Mac to guarantee loans in excess of the $417,000 conforming loan limit to inject liquidity into the secondary market for jumbo loans, officials told Congress Thursday.

In testimony before the House Financial Services Committee, Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke said that any such move would be temporary, and should be accompanied by tighter oversight of Fannie and Freddie.

Bernanke also said such action would have to be taken promptly, because financial markets will r

The Bush administration will consider allowing Fannie Mae and Freddie Mac to guarantee loans in excess of the $417,000 conforming loan limit to inject liquidity into the secondary market for jumbo loans, officials told Congress Thursday.

In testimony before the House Financial Services Committee, Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke said that any such move would be temporary, and should be accompanied by tighter oversight of Fannie and Freddie.

Bernanke also said such action would have to be taken promptly, because financial markets will recover in coming months.

“If it comes on line in March, it’s not going to be effective,” Bernanke said, responding to questioning by Rep. Richard Baker, R-La.

In his prepared remarks to the committee, Paulson said there was “little question that allowing the GSEs to securitize jumbo mortgages would give a short-term lift which would be helpful.” The secondary market for jumbo loans, he said, “has shown some recent improvement but is not functioning as normal.”

While Paulson agreed that Fannie and Freddie’s entry into the jumbo loan sector would improve liquidity, he said such loans have traditionally been a “very profitable” part of the mortgage market with low default rates, and “it seems logical that this market will right itself in the weeks and months ahead.”

Any move to allow the government-sponsored entities (GSEs) to securitize jumbo loans should be temporary, and part of legislation strengthening oversight of Fannie and Freddie, Paulson said, referring to a GSE reform bill passed by the House in May.

A permanent increase in the $417,000 conforming loan limit “raises difficult public policy issues and could be seen as detracting from the GSEs’ affordable-housing mission and displacing private-sector participation, which the Administration does not support,” Paulson said.

The GSE reform bill approved by the House in May, HR 1427, would allow Fannie and Freddie to securitize loans up to $625,000 in areas where the median home price exceeds the conforming loan limit.

The bill left the $417,000 conforming loan limit in place, however, meaning the GSEs would not be able to buy larger loans to hold in their own investment portfolios.

Rep. Barney Frank, D-Mass., has since said it was a mistake not to legislate an increase in the conforming loan limit, and urged the Senate to take such action in its version of a GSE reform bill.

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