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OFHEO Chief Says Loan Limit Increase Might Make Sense

OFHEO Director James Lockhart spoke about GSE reform and the notion of raising the conforming loan limit today at the American Enterprise Institute, a Washington, D.C.-based think tank.

Lockhart said a temporary increase in the conforming loan limit “might make some sense,” but only if the mortgage financiers improve the risk management of their loan portfolios.

Fannie Mae and Freddie Mac “would need to put in all the proper safety and soundness risk management around it rather than just jumping in,” Lockhart said, but also warned that entering the jumbo loan market could threaten their main purpose, which is to provide affordable housing.

Last month, the OFHEO decided to keep the conforming loan limit at $417,000 for the third straight year, despite the fact that the average October-to-October change in home prices fell 3.49%.

The California Association of Mortgage Brokers has been lobbying to raise the conforming loan limit from $417,000 to $625,000, which they estimate will allow tens of thousands of homeowners to obtain more favorable financing terms.

Fannie Mae and Freddie Mac, as well as certain Senators have also been pushing for a temporary lift of the conforming limit to ease the credit crunch, though the Bush Administration and Fed Chief Bernanke have been strongly opposed.

The House of Representatives approved legislation in May as part of their GSE reform bill that would permanently increase the conforming loan limit and take into account higher home prices in pricier markets throughout the United States.

Lockhart said the recent turmoil in the financial markets “prove it is time for the Senate to act” on its version of GSE reform, remarking, “if not now, then when?”

In regard to recent capital woes plaguing the GSEs, Lockhart said he would consider whether the 30 percent capital surplus “is lifted entirely or changed” and said “portfolio limits could come off as early as late February.”

But said, “I’d hate to relax the capital requirement just because they are losing money. That is not the reason to relax the capital requirement.”

Government sponsored entities Fannie Mae and Freddie Mac own or guarantee roughly 40 percent of the $11.5 trillion U.S. residential mortgage debt.

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