Fannie Mae and Freddie Mac’s appeals to raise limits on their existing loan portfolios were met with disapproval by both the Bush Administration and The Office of Federal Housing Enterprise Oversight late last week.
Democrats had urged the agency to allow government sponsored entities Fannie Mae and Freddie Mac to scoop up additional mortgage-backed securities that had been abandoned by panicking bond investors who were recently turned off by increased risk and soaring delinquencies.
Both Senator Christopher Dodd (CT) and Senator Charles Schumer (NY) asked the OFHEO to raise the limits set on the two mortgage financiers’ portfolios as a means to restore the ailing credit markets.
However, their demands fell on deaf ears because of accounting misstatements made by the two government sponsored entities last year, and the move by the Federal Reserve to solve credit woes by injecting more liquidity into the market instead.
President Bush felt that a “robust reform package” would be necessary before the two agencies would see any increase in their current caps, including a complete overhaul of their governance and accounting practices.
Currently, Fannie Mae is required to limit its loan portfolio to $727.2 billion, while Freddie Mac must curtail annual growth of its $712.1 billion loan portfolio to no more than 2%.
It is believed that Fannie Mae had requested a 10% increase in their asset ceiling to meet the supply of conforming loans currently on the market.
The current conforming loan limits are $417,000 for a single-family residence, $533,850 for two-unit properties, $645,300 for three-unit properties, and $801,950 for four-unit properties.
But with home prices at or near all-time highs, typical loan amounts in popular housing markets throughout the country fall into the jumbo realm (which can’t be purchased by Fannie or Freddie), even with a sizable down payment.
And jumbo loans have very few buyers on the secondary market, forcing interest rates up higher than 8%, along with a cost of several “mortgage points”.
Even so, jumbo loans, stated loans, piggyback financing, and many other non-conventional loans have been stamped out because of their current distaste on Wall Street, and the result will be a large increase in conforming loan production.
The supply of conforming loans will rise significantly as banks and lenders throughout the United States limit their loan origination to government-backed mortgage programs (FHA loans, VA loans), and Fannie and Freddie are chomping at the bit to get a piece of the action.
Fannie Mae and Freddie Mac currently own or guarantee 40% of the $10.9 trillion residential mortgage market, but they want more, much more.
Shares of Fannie Mae dropped to 64.12, down $2.34, or 3.52% on the news, while Freddie Mac dipped to 61.52, shedding 43 cents, or 0.7%.