The Federal Housing Finance Agency has announced plans to reduce the maximum size of mortgages eligible for backing by government-sponsored enterprises Fannie Mae and Freddie Mac, a move that likely will face opposition in Congress, The Wall Street Journal reported Sept. 9.
The FHFA hopes the move will gradually reduce the amount of government support in the mortgage market and allow more private guarantors to enter the market. However, some critics argue the move could further shrink the nation’s number of eligible borrowers, damaging housing recovery.
Gary Thomas, president of the National Association of Realtors, told the Journal the move is premature and should not be taken until private capital is fully engaged in the market.
Currently, Fannie and Freddie will back mortgages with balances as high as $417,000 ($625,500 and $721,050 in higher priced markets like parts of New York, California and Hawaii). Any mortgages that exceed those limits are known as “jumbo” loans.
The FHFA’s announced changes will go into effect Jan. 1, 2014, though the agency has not announced yet how low it will drop the loan limits, but a spokesperson did indicate the limits would decrease gradually. The agency does not require Congressional approval for the changes so long as Fannie and Freddie remain under government control.
With nine in 10 new loans receiving government backing these days, some are worried the FHFA’s move could further restrict already tight credit and slow housing recovery, which may already be slowing due to rising interest rates.
According to the Journal, banks have expressed willingness to enter the housing market in a bigger way with many offering lower rates to jumbo borrowers than they do for so-called “conforming” mortgages that meet the limits set by Fannie and Freddie.
The Journal reported that banks made almost $59 billion in jumbo mortgages in the second quarter of 2013, a 20 percent increase from a year before and a six-year high. “There’s plenty of liquidity in the market to handle a drop in the conforming limit,” Wells Fargo Home Mortgage Executive Vice President Brad Blackwell told the Journal.
But jumbo borrowers who can’t offer a 20 percent down payment or a credit score of 720 or higher could get locked out of the market with the change in policy. Some say the reduction in loan limits will negatively impact first-time borrowers, as well as those borrowing in expensive markets.