A plan unveiled by the Obama administration today to wind down Fannie Mae and Freddie Mac could take years to implement, but at least one aspect would kick in this year: lowering the ceiling on the jumbo conforming loan limit in high-cost markets from $729,750 to $625,500.
The California Association of Realtors voiced its objections to that aspect of the plan, saying reduced government presence in the mortgage market would raise the cost of homeownership and make mortgages less available.
"Congress needs to understand that during economic downturns, the housing market needs government involvement to ensure capital stability," said CAR President Beth L. Peerce in a statement. History has shown "the private market is incapable and unwilling to step in during the hardest of times and meet the demands of the nation’s homebuyers."
As a matter of policy, the National Association of Realtors also supports making the higher ceilings permanent, "unless the private market begins to make a significant return to the mortgage market." Further restricting liquidity by lowering the limits "would have a dramatically negative impact on our housing recovery," NAR’s government affairs staff said in an issue summary.
The administration’s plan also calls for gradually increasing down-payment requirements on loans guaranteed by Fannie and Freddie to 10 percent, and a continued wind-down of Fannie and Freddie’s investment portfolios.
The wind-down of the portfolios — mortgage-backed securities the government-sponsored entities purchased as investments — could put upward pressure on mortgage rates as Fannie and Freddie continue to shed nearly $1.5 trillion in MBS investments at a rate of 10 percent a year.
The administration’s plan would also require Fannie and Freddie to gradually increase the price they charge for their guarantees over the next several years to bring them in line with the private market.
Lawmakers need to sign off on the plan’s recommendations for them to be put in place, but many Republican lawmakers are eager to usher Fannie and Freddie off the stage as quickly as possible and also reduce the volume of loans insured by the Federal Housing Administration.
"What the administration offered today isn’t a plan to move us forward, but rather a collection of options to consider," Rep. Spencer Bachus, the Alabama Republican who chairs the House Financial Services Committee, said in a statement today. "What’s needed is a real plan, and we intend to sit down with administration officials to find common ground."
Bachus said Fannie and Freddie’s fate must be part of a comprehensive housing finance reform package that includes FHA as well as the private sector.
The Obama administration had promised the long-awaited plan put forward today by the Treasury Department would address not just Fannie and Freddie, but the entire housing finance system.
Treasury Secretary Tim Geithner said the plan does address that broader goal, calling for stronger consumer protections, increased transparency for investors and improved underwriting standards, and returning the FHA to its traditional role of providing assistance to low- and moderate-income borrowers.
But the plan relies on implementation of the Dodd-Frank Wall Street Reform Act to fix "fundamental flaws" in the mortgage market, and implementation of Dodd-Frank remains a hotly debated issue, with real estate and mortgage industry lobbyists battling consumer groups over particulars of the bill.
"We are going to start the process of reform now, but we are going to do it responsibly and carefully so that we support the recovery and the process of repair of the housing market," Geithner said in a statement.
By endorsing a reduction in the $729,750 ceiling on jumbo conforming loans — currently set to fall to $625,500 at the end of September — the Obama administration has increased the likelihood that Congress will not extend the limit again.
Congress created the jumbo conforming loan limit in 2008, after it became impossible for lenders to securitize and sell mortgages to investors unless they were guaranteed by Fannie or Freddie, or alternately Ginnie Mae, which securitizes FHA loans.
Before the emergency ceilings were implemented, Fannie and Freddie’s conforming loan limit was $417,000 in all but a few high-cost markets.
Now, the jumbo conforming loan limit ranges between $417,000 and $729,750 in high-cost markets, and is determined by multiplying the median home price in a given market by 1.25.
A reduction in the jumbo conforming loan limit would affect not only Fannie and Freddie’s ability to guarantee large loans in high-cost housing markets, but FHA’s as well.
In normal housing markets, FHA is only allowed to guarantee loans of up to $271,050. But in high-cost markets, FHA is permitted to insure loans of up to 125 percent of the median home price, with the same $729,750 ceiling as Fannie and Freddie.
The Obama administration’s plan to wind down Fannie and Freddie calls for allowing the temporary increase in the jumbo conforming loan limits reset as scheduled on Oct. 1 to levels set in the Housing and Economic Recovery Act (HERA).
When that happens, the jumbo conforming loan limit in high-cost markets will be 115 percent of median home price, with a cap of $625,500.
The ceiling was briefly allowed to drop back down to $625,500 in early 2009, but Congress quickly restored the higher jumbo conforming limit as part of the $787 billion economic stimulus bill passed in February.
The market for so-called "private label" mortgage-backed securities that fund loans not backed by the government collapsed in 2007. Since then, only one $238 million securitization of private-label MBS has taken place, said Sarah Wartell of the Center for American Progress, at a hearing Wednesday.
Wartell said she fears the consequences of lowering the conforming loan limit before the market for private-label MBS recovers.
"If the loan limit were to fall and the private securitization market was unable to provide capital for homes above a newly reduced conforming loan limit, then homes valued in that band will find credit constrained and it will have an effect on the ability to find buyers, the ability to sell homes, and the value of homes whether or not on the market," Wartell said in her prepared testimony. "In such a fragile economy, policy-induced home-price declines seem unwise."
Those who support allowing the ceiling to come down note that the "spread," or difference in rates between jumbo loans not backed by the government and conforming loans eligible for purchase by Fannie and Freddie, has come down considerably since the peak of the crisis.
Those who want Fannie, Freddie and FHA out of the jumbo loan business say that while jumbo borrowers may have to pay higher rates, they will still be able to obtain loans.