Push on to Freeze Loan Ceilings of Housing Agencies

A powerful lenders’ trade group is hoping to prevent two key government housing agencies from raising their loan limits in what critics say is an attempt to “force” adjustable-rate mortgages on a public that overwhelmingly prefers fixed-rate loans.

The U.S. League of Savings Institutions is trying to convince the Federal National Mortgage Assn. and the Federal Home Loan Mortgage Corp. that the two agencies should not raise the limits on the size of the loans they buy from lenders.

Officials of the U.S. League--which includes some of California’s biggest lenders--also have taken their case to Congress, but so far have had little luck in getting their proposed changes made.

Fannie Mae and Freddie Mac are key players in the nation’s housing market, even though most home buyers don’t understand exactly what the two agencies do.

Purchase Loans

Both were formed by Congress to make more mortgage money available to home buyers and to lower the cost of borrowing by creating a “secondary market” for mortgage loans.

They purchase loans from lending institutions, which gives the institutions the money they need to make new mortgage loans to home buyers. Fannie Mae and Freddie Mac then “pool” the mortgages they purchase and repackage them into different types of securities for investors.

Currently, Fannie Mae and Freddie Mac are not allowed to purchase a loan of more than $133,250. Some lenders simply refuse to make loans for more than that amount because they couldn’t sell the loans to the two agencies.

Many others make only adjustable loans over that amount because their ability to raise the interest rate on the loan allows them to pass along most of their risk to the borrower.

For each of the last six years, the loan limit has been raised so that Fannie Mae and Freddie Mac can keep up with the rising cost of housing. Without those annual increases, the two agencies would be stuck with a 1979 loan limit of $75,000--a ceiling which would effectively knock the two firms out of California, the East Coast, and many regions in between.

Raising the Limit

If the two agencies weren’t operating, people who wanted to buy a more expensive home could find it difficult and more costly to obtain a loan. A loan they could obtain would likely have an adjustable rate instead of one that’s fixed.

The next increase--which would take effect Jan. 1,--would likely raise the current $133,250 ceiling to between $150,000 and $160,000.

If the limit is raised to $150,000, according to estimates by the California Assn. of Realtors, about 75% of all loans in this state could continue to be sold to Fannie Mae and Freddie Mac. But if the limit is frozen, only about 60% could be sold to the two agencies.

“In California alone, you’re talking about 85,000 households that wouldn’t have a choice of a Fannie Mae loan next year if the freeze goes through,” says Joel Singer, CAR’s chief economist. “That’s 85,000 people who are going to pay a higher interest rate, and they might not be able to qualify for a fixed-rate mortgage at all.”

The U.S. League says it wants the current limit frozen--at least temporarily--until the index used to calculate the annual adjustment is re-examined.

More Government Involvement

Dennis Jacobe, the league’s research director, says his trade group is opposed to the increase for several reasons. He points out that the index doesn’t take into account regional variations in the cost of housing, and claims that raising the ceiling encourages more government involvement in the housing industry.

In turn, he says, the government is “crowding out” some private-sector lenders and firms that compete with Fannie Mae and Freddie Mac.

“This is a case where you’ve got the government doing something that could be done very efficiently by the private sector,” Jacobe says. “If the limits are raised, you’re encouraging further government involvement.”

Jacobe also says Fannie Mae’s and Freddie Mac’s purchase of large loans “amounts to subsidizing high-income buyers,” in part because the two agencies are linked to the federal government.

Claims Subsidies

Investors who purchase securities issued by the two agencies are willing to settle for a smaller return on their investment because the securities have an implicit government guarantee. These lower rates trickle down to home buyers.

“If the limits are raised to $150,000 or $160,000, you’re talking about people who are buying pretty expensive homes,” Jacobe says. “I think there’s a real question here about whether the federal government should be subsidizing those (high-income) home buyers.”

But the U.S. League’s efforts to defeat the annual increase is drawing fire from realtors, home builders, and even some dissident lenders.

They note that although Fannie Mae and Freddie Mac were created by Congress, neither agency is funded with tax dollars. Fannie Mae is a publicly held company whose stock trades on the New York Stock Exchange, while Freddie Mac is owned by thrift institutions that are members of the 12 Federal Home Loan Banks.

Adjustable Mortgages

What’s more, critics note, both agencies are extremely profitable; they actually produce tax revenue instead of eating it up.

Some opponents of the freeze say the U.S. League’s efforts are simply a thinly veiled attempt to push adjustable-rate mortgages on a public that’s currently clamoring for fixed-rate loans.

According to figures compiled by the Federal Home Loan Bank Board, 66% of all home buyers nationwide opted for a fixed-rate loan instead of an adjustable one in August, in part because fixed-rate loans are at their lowest levels of the decade.

In California, Arizona and Nevada, however, only one-third of the home buyers took a fixed-rate mortgage--in part because the Fannie Mae and Freddie Mac limit discourages lenders from making fixed-rate loans of more than $133,250.

California Affected

A freeze on the two agencies’ ceilings would give lenders “an even bigger market to force adjustables on home buyers,” says Jack Paulson, a San Jose real estate broker and president-elect of the California Assn. of Realtors.

If the U.S. League is successful in its efforts to quash the increase, Paulson adds, people who need a loan of more than $133,250 will likely have two choices: “They can get a fixed-rate loan with an exceptionally high interest rate or they can take out an adjustable-rate mortgage.”

A freeze “would be especially bad here in California because prices are already high, and they’re going up about 15% a year. It would cut out the average home buyer who wants and needs the protection of a fixed-rate mortgage,” Paulson said.

Dale Riordan, a Fannie Mae official, is puzzled by the timing of the U.S. League’s efforts to freeze the loan-limit increase and tinker with the index used to calculate the annual adjustment.

Charge Additional Point

“The U.S. League itself is saying 1986 is going to be the best year for thrift industry profits in years,” Riordan says. “Next year is looking even better.

“For them to be putting pressure on us now is just nonsense, to be perfectly blunt about it.”

Home buyers looking for a loan that exceeds the current Fannie Mae and Freddie Mac limits are already paying as much as one full percentage point--or more--to obtain a loan.

Riordan says a freeze on the limit “would undoubtedly mean higher rates” for people who need large loans, and recently complained that proponents of a freeze “want to gouge buyers.”

Just how successful the U.S. League’s efforts to prevent Fannie Mae and Freddie Mac from raising their loan limits will be remains to be seen. Riordan says Fannie Mae officials would likely be unwilling to voluntarily keep the $133,250 limit because it could be sued by shareholders angry that “we’d be voluntarily excluding ourself from a large part of the secondary market.”

Review of Index

The league, however, may have better luck with Freddie Mac. Less than two weeks ago, Freddie Mac’s 46-member advisory committee--composed mainly of representatives from lending institutions, real estate concerns and Wall Street investment houses--recommended that the agency’s board of directors review the index which determines the annual loan-limit adjustment.

The effort to modify the index is being led by a group of S & Ls that want to scale back the government’s involvement in housing finance. Most of these lenders don’t sell their loans to Fannie Mae and Freddie Mac.

Leaders of the movement reportedly include Oakland-based Golden West Financial, parent of World Savings & Loan, and Beverly Hills-based Great Western Financial Corp., parent of Great Western Savings & Loan.

Great Western makes only adjustable-rate loans, while World makes both fixed- and adjustable-rate mortgages. One of Freddie Mac’s directors recently said the agency will likely consider the advisory committee’s recommendation by the end of this month.

Only Temporary Increase

Herbert M. Sandler, Golden West’s chief executive, admits that a freeze on the loan limits could cause a “marginal” increase in interest rates on loans for more expensive homes. But, he claims, the increase would only be temporary.

“I think the big question here is whether it is advisable, or desirable, for realtors or consumers or lenders to have federal agencies control the entire real estate market,” Sandler said. “That’s the question being posed by the growth at Fannie Mae and Freddie Mac.

“In the long term, the real estate industry and the consumer will be better off (if curbs are enacted) because you’ll have a lot more lenders in real estate when they don’t have such competition from the government.”

The U.S. League has two main tasks to accomplish in order to freeze the loan limits or make changes in the way the index is calculated. First, the trade group must convince Freddie Mac’s directors that the index used to calculate the annual adjustment should be changed--a job some observers say the league can handle.

More Difficulties

The second task--convincing Fannie Mae to join the freeze or approve the changes--will be more difficult to accomplish. “If Fannie Mae won’t go along with Freddie Mac, Freddie Mac won’t make the changes,” says one trade group official. “Freddie Mac isn’t going to give Fannie Mae the entire market for loans over $133,250.”

Lenders could ask Congress to “force” Fannie Mae to go along with Freddie Mac, the official added, “but I really don’t know how that would turn out. You’d have lenders on one side, and realtors and (Fannie Mae) shareholders on the other. Things would get pretty messy.”

Critics of the U.S. League’s efforts note that a freeze on Fannie Mae and Freddie Mac’s loan limits are only part of some lenders’ plans to scale back the government’s involvement in America’s housing market.

A task force formed by Freddie Mac’s advisory council, for example, unveiled a sweeping privatization plan a few months ago that would split Freddie Mac into two entities--a down-sized government operation and a private corporation. Although the advisory committee postponed a decision on the proposal Oct. 15, it also widened the scope of the privatization study.

The Reagan Administration has also proposed changes for Fannie Mae and Freddie Mac that critics say could further crimp their activity.

“The entire secondary mortgage market is under attack,” says CAR’s Paulson, “and the ultimate loser could be the home buyer.”