Wall Street Journal
By: Nick Timiraos
September 8, 2013
Federal officials are preparing to reduce the maximum size of home-mortgage loans eligible for backing by Fannie Mae FNMA 0.00%and Freddie Mac, FMCC -0.88%a move that is likely to face resistance from some lawmakers in Congress and the real estate industry.
The proposed move is designed to wean the mortgage market off government support and allow the market for non-government-guaranteed mortgages to take a bigger role. But critics argue that any such move will shrink the pool of eligible home buyers, stunting the nation's housing recovery. "It would be counterproductive to make changes to the loan limits before private capital is fully engaged," said Gary Thomas, president of the National Association of Realtors.
Currently, Fannie and Freddie Mac can back mortgages that have balances as high as $417,000 in most parts of the country and up to $625,500 in expensive housing markets, including parts of California and New York, and as much as $721,050 in Hawaii. Mortgages within the limits are called "conforming" loans; mortgages that exceed them are called "jumbo" mortgages. Federal officials are preparing to reduce the maximum size of home-mortgage loans eligible for backing by Fannie Mae and Freddie Mac, a move that is likely to face resistance from some lawmakers and the real estate industry.
The Federal Housing Finance Agency, which regulates Fannie and Freddie, hasn't announced how far it will drop the loan limits, which would take effect Jan. 1, 2014, and a spokeswoman declined to elaborate on specifics. But in a statement, the agency said a "gradual reduction in loan limits is an appropriate and effective approach to reducing taxpayers' mortgage-risk exposure...and expanding the role of private capital in mortgage finance."
The FHFA says it doesn't need congressional approval given broad powers it enjoys, so long as Fannie and Freddie remain under government control. The policy change illustrates a key challenge facing federal housing officials, who have taken extraordinary steps to keep mortgage credit flowing since the housing market crashed six years ago.
Home prices have rebounded due partly to record low interest rates. But with nine in 10 new loans receiving some form of government backing, officials are trying now to engineer a retreat without upending the recovery.
Any fight over loan limits "shows why it is going to be hard" to reduce the government's role in the mortgage market, said Paul Miller, a banking analyst at FBR Capital Markets. "A lot of people who talk about having more private capital, they're not ready to walk the walk," he said.
Lenders say they are eager to fill any gap left by a decline in the loan limits. Already, banks have been competing to make loans to the most creditworthy jumbo borrowers by offering rates that are in some cases lower than conforming-loan rates. Before the crisis, jumbo rates were at least a quarter of a percentage point above conforming loans, and until last year, jumbo loans were more than 0.5 percentage points higher.
"Given where banks are pricing jumbo mortgages, it seems like a relatively small risk on the part of the government to take the next step," said Michael McMahon, managing director at Redwood Trust Inc., a Mill Valley, Calif., investment firm that securitizes jumbo mortgages.
During the second quarter, banks made nearly $59 billion in jumbo mortgages, up 20% from the previous-year period to a six-year high, according to Inside Mortgage Finance. "There's plenty of liquidity in the market to handle a drop in the conforming limit," said Brad Blackwell, executive vice president at Wells Fargo Home Mortgage, the nation's largest mortgage lender.
Still, some jumbo borrowers could be locked out, particularly those who don't have at least a 20% down payment or a credit score below 720. "There will be a hole left," said Mr. Blackwell.
In San Rafael, Calif., where home prices are up by more than 17% from one year ago, a reduction in loan limits could make it more difficult for borrName