Thursday, February 21, 2008


The piece of the government’s economic stimulus plan aimed at bolstering the housing market may not work out as planned.

While Fannie Mae and Freddie Mac can now purchase and guarantee home loans of up to $729,750, they won’t be traded in a key secondary market, limiting the prospect for sharply lower rates on “jumbo” mortgages.

To address the worst housing crisis in decades, the $168 billion economic stimulus package President Bush signed this month included a temporary increase in the cap on mortgages that the government-sponsored companies can purchase or guarantee, from $417,000 to $729,750 in high-cost markets.

In theory, this was supposed to spark investor demand for securities made up of higher-value mortgages backed by Fannie and Freddie, which would have the effect of driving down interest rates on jumbo loans and spur home buying and refinancing activity. In practice, the impact is expected to be muted.

That’s because mortgages above the conforming loan limit of $417,000 will not be allowed to be blended into packages of other loans traded in the To-Be-Announced secondary market. The rationale is that these larger loans carry greater risks and would thereby push up prices for securities tied to conforming loans, according to Wall Street’s biggest trade group, the Securities Industry and Financial Markets Association.

The association said Friday that segregating the new securities would be the “least disruptive option.”

Because the securities derived from Fannie- and Freddie-backed jumbo loans will be traded in less liquid markets, the interest rates on these loans will need to be higher to attract investors. And that’s less-than-ideal for consumers looking to take out or refinance jumbo home loans.

“It’s sort of an artificial barrier to segregate the loans in this way,” Lawrence Yun, chief economist at the National Association of Realtors, said yesterday.

Rather than separating loans based on whether they fall above or below the $417,000 level, Mr. Yun said it might make sense to assess each mortgage on the basis of their relative risk profile, or by which geographic area they are in.

Interest rates on jumbo mortgages have been running about a percentage point higher than those for conforming loans for months. That unusually wide spread is a reflection of investors’ post-credit-crunch wariness toward mortgages not backed by Fannie, Freddie or Ginnie Mae, a government agency that sells bonds backed by the Federal Housing Administration.

The average rate nationwide last week for a 30-year fixed-rate conforming mortgage was 5.7 percent, compared with an average 6.7 percent for jumbo mortgages.

For a variety of reasons, Fannie and Freddie likely won’t begin to buy the costlier mortgages and bundle them into securities for sale on Wall Street until sometime in the April-through-June quarter.

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