The government is considering raising the limits on purchases of home loans by Fannie Mae and Freddie Mac to help ease a liquidity crunch in the mortgage market.
The federally chartered enterprises are the largest source of money for home loans, with combined portfolios of $1.4 trillion.
Alphonso R. Jackson, secretary of the Department of Housing and Urban Development, yesterday said he talked with Fannie Mae Chief Executive Officer Daniel Mudd and James Lockhart, director of the Office of Federal Housing Enterprise Oversight, about increasing Fannie"s mortgage purchases beyond the current $722.5 billion limit.
"I told him we will take it under advisement and give him an answer probably by [today]," the housing secretary told Bloomberg News.
Besides discussing an increase in overall mortgage holdings, Mr. Jackson said they discussed the possibility of allowing Fannie Mae and Freddie Mac to buy larger mortgages, or so-called "jumbo" loans, that exceed the federal cap of $417,000. Such jumbo loans are common in the Washington area, where house prices are more than twice the national average, but they are becoming increasingly hard to get.
Banks typically sell home loans they originate to Fannie and Freddie — or, in the case of jumbo loans, they sell to private investors through Wall Street firms — to raise the funds they need to make more loans. But the widening credit crunch on Wall Street, precipitated by a surge in defaults, has caused investor interest in private mortgage securities to dry up.
The contagion on Wall Street so far has not spread to securities backed by Fannie and Freddie. Fannie and Freddie preserved their reputations for quality for the most part by staying out of the subprime fray. Under criticism from Congress and the administration, they were cutting back their mortgage purchases even while the private lending business was booming in the early 2000s.
While the mortgage agencies would like to help alleviate the crisis brought on by bad lending practices in the private sector, they are limited by what they can do because of the stricter lending standards they follow — some of which are imposed by Congress. They are expected to uphold the strict new rules on exotic and subprime mortgages that, for example, prohibit combining undocumented loans with no down payments.
President Bush told reporters yesterday that his priority is ensuring that Fannie Mae and Freddie Mac complete the reforms they agreed to as part of a settlement for committing $11.3 billion in accounting errors. While stressing that his priority is for remediation at the companies, Mr. Bush did not reject the idea of raising the portfolio limits.
"First thing, we back is reforming these entities," he said. "Let"s get them reformed first. Now is the time to get it done."
The president"s remarks suggest that the administration is concerned that some opponents of reform at the agencies and in Congress will attempt to use the current crisis in the mortgage market to forestall the restructuring of Fannie Mae and Freddie Mac.
Senate Banking, Housing and Urban Affairs Committee Chairman Christopher J. Dodd, Connecticut Democrat, and Sen. Charles E. Schumer, New York Democrat, among other lawmakers, has asked regulators to loosen some restrictions on Fannie and Freddie and allow them to buy more loans.
"Regulators should consider devising an action plan to help prevent the spike in foreclosures that is anticipated and preserve liquidity in the secondary mortgage market," Mr. Schumer wrote to Treasury Secretary Henry M. Paulson Jr., Federal Reserve Chairman Ben S. Bernanke and other regulators yesterday.
Mr. Schumer is particularly concerned about the sudden unavailability of jumbo mortgages, which are used frequently in New York, as they are in Washington, because the value of most houses exceeds the $417,000 threshold for jumbo loans.
"Nobody, including me, wants or expects the federal regulators to step in and lend a hand to the private-sector players who took risky gambles in the subprime market," he said. "But when millions of Americans who have good credit now face the real possibility of not being able to purchase a home because of spillovers from the subprime market, we need the regulators to play a leadership role to preserve market liquidity and minimize the damage."
Mr. Jackson said Fannie Mae and Freddie Mac "have a role" to play in reviving mortgage credit.
"Can they resolve the whole problem? No," he said. "But I think they can help curb the problem to a point."
Mortgage analysts agreed that Fannie Mae cannot entirely cure what"s ailing the mortgage markets.
Joshua Rosner, analyst with Graham Fisher, said "mass delusion" on Wall Street has led many investors to pray for a bailout, but the agencies will be unable to buy the most troubled loans in the sub-prime and "Alternative-A" categories where liquidity dried up. He added it would take an act of Congress for them to get into the jumbo loan business.
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