Housing Bill Could Be Bad News For Expensive Mortgages

WASHINGTON - May 22 2008 - A Senate bill aimed at reviving the beleaguered U.S. housing market could make borrowing for a home more expensive in high-priced markets such as California and New York.

If the bill passes, the limit on the size of loans that can be purchased by government-sponsored mortgage finance companies Fannie Mae and Freddie Mac will drop to $550,000 after spending 2008 at nearly $730,000.

Loans purchased by Fannie Mae and Freddie Mac typically have lower interest rates because of the perception on Wall Street that the government-sponsored companies would be bailed out in the event of default.

Until this year, though, the companies were restricted to buying mortgages of $417,000 or less, which are known as “conforming” loans.

The economic stimulus package signed by President Bush in February temporarily raised the maximum size of conforming mortgages that Fannie and Freddie can purchase and bundle into securities sold to investors. The limit, which expires by year-end, was raised from $417,000 to as high as $729,750 in expensive parts of the country.

The combined market share of Fannie and Freddie has grown to more than 80 percent of all new mortgages in the U.S. this year, an increase from 40 percent a year ago, due mainly to the woes in the housing market.

How high to set Fannie and Freddie’s permanent loan limits and whether to allow the companies to hold larger “jumbo” loans for investment, rather than sell them as securities, is likely to be a key point of contention in the coming weeks as lawmakers debate a comprehensive housing bill.

With Democrats and Republicans banding together to push the plan through the Senate Banking Committee on a 19-2 vote Tuesday, the chances for a broad election-year housing aid package have increased substantially.

However, some lawmakers warn that the mortgage market will be hampered if Fannie and Freddie are not allowed to hold jumbo loans. Fannie and Freddie have found few buyers for investments backed by these loans because of investors’ skittishness about securities perceived as even slightly risky amid a global credit crunch.

Not allowing Fannie and Freddie to hold such loans on their books “would be a serious problem” that would “really crimp any recovery,” in the U.S. housing market, Sen. Charles Schumer, D-N.Y., said Tuesday.

“Nobody really knows when we’re going to get any sort of recovery. It’s a healing process,” said Keith Gumbinger, a senior vice president with financial publisher HSH Associates.

Jumbo loans’ market share fell to 8 percent of all new mortgages in the first quarter of 2008, down from 15 percent in the quarter a year earlier, according to trade publication Inside Mortgage Finance.

Republicans are generally wary of adding more risks for Fannie and Freddie, and have resisted an expanded role for the two companies. Democrats, however, see the companies as a way to stabilize the mortgage market.

In response to declining interest from investors, Fannie and Freddie have been left to stimulate the market themselves.

Freddie said last month it would buy up to $15 billion in jumbo home loans, while Fannie said earlier this month it would buy those larger loans through the rest of the year without charging a premium for additional risk.

Some signs of stabilization have emerged in recent weeks. As of last week, rates on Fannie and Freddie-backed jumbo loans were averaging 6.5 percent, a premium of 0.4 percentage points over the rate for conforming loans, according to HSH Associates. That premium had been about 0.7 percentage points a month earlier.

Mortgage broker Joe Adamson of Mortgage Magic in San Jose, California, said lawmakers need to balance the desire to expand loan limits for expensive parts of the country such as Silicon Valley with the need to make sure that Fannie and Freddie don’t take on more risk and cause even more mortgage market turmoil.

If Fannie and Freddie are allowed to expand too far, he said, “you’re creating the potential for a disaster should some mismanagement type of thing occur.”

However, Steve Habetz, president of Threshold Mortgage in Westport, Connecticut, said higher limits are needed for expensive parts of the country, such as the New York suburbs. While a permanent extension to more than $700,000 would be preferable, he said, “I’ll take what they’ll give me.”

Housing bill could be bad news for expensive mortgages
by ALAN ZIBEL | Associated Press