Fannie, Freddie won’t reduce loan limits, regulator says

Fannie, Freddie won’t reduce loan limits
FHFA director Mel Watt’s action ensures that Fannie and Freddie will keep playing the main role in housing finance for the foreseeable future.
(Andrew Harrer / Bloomberg)

With the housing market showing signs of slowing, the nation’s regulator of Fannie Mae and Freddie Mac said he doesn’t want the giant mortgage financing firms to start reducing the federal government’s outsized role in helping borrowers get home loans.

By keeping Fannie and Freddie on course, Mel Watt, the new director of the Federal Housing Finance Agency, essentially announced a major shift in direction for the bailed-out companies, one that ensures they will keep playing the main role in housing finance for the foreseeable future.

Watt, the first Democrat to run the agency under President Obama, said Tuesday that he would not force Fannie and Freddie to reduce the limits on loans they buy or guarantee as the previous regulator had indicated.

In addition, he said the agency was taking steps to loosen mortgage credit by easing standards on when banks could be forced to buy back some loans sold to Fannie and Freddie.


“Mel Watt just made it easier to get a home,” said Ed Mills, a policy analyst at FBR Capital Markets.

The moves came as sales slumped in Southern California last month, part of a nationwide cool-down triggered, in part, by rising mortgage rates.

Although the median sale price was up 1% compared with March in the six-county region, sales fell year-over-year for the seventh straight month, according to research firm DataQuick in San Diego.

The housing market across the country has slowed to the point that Federal Reserve Chairwoman Janet L. Yellen said its disappointing performance so far this year warranted close watching.


With housing crucial to the economic recovery, Watt’s first major speech since taking over as the overseer of Fannie and Freddie in January was highly anticipated because Fannie and Freddie purchase or guarantee about 60% of new mortgages.

In December, the agency asked for public comment on a plan to reduce Fannie’s and Freddie’s loan limit to $400,000, from $417,000, in much of the country and to $600,000, from $625,000, in Southern California and other high-cost markets.

Such a reduction probably would make it harder for home buyers to obtain mortgages, analysts said.

Watt said the agency reviewed the comments and decided not to reduce the limits.

“This decision is motivated by concerns about how such a reduction could adversely impact the current health of the housing finance market,” Watt said at a forum on the future of Fannie and Freddie hosted by the Brookings Institution think tank.

The announcement came after Watt decided in January to delay a planned increase in fees that Fannie and Freddie assess on lenders to guarantee their loans and that usually are passed on to the borrower. He wanted more time to study the effect of an increase on the housing market.

The decision to hold off on reducing the loan limits was good news for Southern California, said Stuart Gabriel, director of UCLA’s Ziman Center for Real Estate.

“I would imagine that those with housing equity in the Los Angeles area and other major metropolitan areas categorized as high-priced would breathe a sigh of relief,” he said.


Mortgages purchased or backed by Fannie and Freddie typically come with lower interest rates, he said.

The moves by Watt reverse a planned course for Fannie and Freddie, whose rescues combined were the most costly and controversial of the financial crisis.

Instead of gradually reducing their role in the housing market to try to entice more private companies to enter — the policy of the agency’s previous director — Watt said he wanted Fannie and Freddie to continue to help make mortgages widely available to home buyers.

“The Obama administration continues to worry about the health of the housing sector,” Gabriel said.

Obama nominated Watt, a former congressman, to replace Edward J. DeMarco, a career bureaucrat appointed to the agency’s No. 2 position by President George W. Bush.

DeMarco became acting director when another Bush appointee, James Lockhart, stepped down in 2009.

DeMarco rejected requests by Obama and Democrats to force Fannie and Freddie to write down principal on mortgages to help homeowners facing foreclosure.

Most Republicans opposed Watt’s nomination. They praised DeMarco for protecting taxpayer money pumped into the companies.


Watt said Tuesday that the agency was studying principal reductions but decided there were other issues to focus on first.

“It doesn’t mean we are not considering it,” he said. “It just means we’re not ready to talk about it at this point.”

The agency soon will seek public comment on the fee increases, which were set to take effect this spring, Watt said. The agency had estimated that the fees for a 30-year fixed-rate mortgage would have increased by 0.14 percentage point.

The main goal is to ensure that Fannie and Freddie “operate in a safe and sound manner,” Watt said.

But to help support the housing market, Watt also made changes in the agency’s standards for forcing lenders to buy back mortgages that Fannie and Freddie purchase. Those standards have made banks hesitant to lend to people without stellar credit scores, Mills said.

One change will allow a homeowner to have as many as two 30-day late payments during the first three years of a mortgage.

The changes mean lenders no longer have to look for “the perfect borrower,” and that should make mortgages easier to obtain for some buyers, Mills said.

Lenders still must adhere to tougher federal mortgage standards, including requirements that buyers’ incomes be documented and their ability to repay the loan be carefully assessed.

Failure to take those steps during the subprime housing boom left Fannie and Freddie saddled with billions of dollars’ worth of bad mortgages. The firms received a total of $187.5 billion in taxpayer money after they were seized in 2008 to prevent their collapse.

The housing market’s rebound dramatically improved the finances of the companies, allowing them to pay large quarterly dividends to the federal government for the bailout money. They said last week that they would pay $10.2 billion more in dividends to the Treasury after reporting first-quarter profit.

With the payments, the companies will have sent $213.1 billion in dividends to the Treasury, more than offsetting the cost of the bailout.

There is broad agreement that Fannie and Freddie should be replaced, and House and Senate lawmakers are working on legislation to do that as part of an overhaul of the housing finance system.

The Senate Banking Committee is expected to pass an overhaul bill Thursday, but it appears unlikely that it will make it through Congress this year.

Watt said he would not comment on the reform efforts because they are not part of his agency’s role as conservator for the seized companies.

“Congress and the administration have the important job of deciding on housing finance reform legislation, not FHFA,” he said.

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