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Realtors to Regulator: Don’t Lower the Loan Limits

blogs.wsj.com | September 19, 2013

By Nick Timiraos

A top housing trade group said Tuesday that the federal regulator for mortgage companies Fannie MaeFNMA +6.84% and Freddie MacFMCC +6.19% doesn’t have the authority to lower the maximum loan amounts that the firms are able to purchase.

The Federal Housing Finance Agency said last month it was considering a reduction in the loan limits, which are set at $417,000 for most of the U.S. but rise to as high as $625,500 in high-cost housing markets such as Los Angeles and New York.

Typically, loan limits were indexed to home prices, and they would rise annually depending on the median U.S. home price. But loan limits never fell once home prices did.

In a letter to the FHFA sent Tuesday, the National Association of Realtors challenged the regulator’s legal authority for such a move, arguing that Congress had been explicit about its intentions to prevent loan limits from declining.

The FHFA has said that it has broad powers as the conservator overseeing the government-controlled mortgage companies that could allow it to issue special directives limiting the firms’ ability to purchase loans above a reduced loan limit. The NAR pre-emptively challenged that legal basis in its letter.

“If you had the authority to ignore the prohibition against reducing loan limits, what would prevent you from making other fundamental changes?” said Gary Thomas, the NAR’s president.

A spokeswoman for the FHFA didn’t immediately reply to a request for comment.

The NAR also argued that reducing the loan limits would be bad policy. While rates on jumbo mortgages—those too large for government backing—have fallen close to parity with rates on conforming loans that are eligible for backing by Fannie and Freddie, jumbo mortgages typically require larger down payments and higher credit scores.

“An arbitrary reduction in existing limits, in the hope it will encourage more private sector lending, is a social policy experiment that risks dampening or reversing the ongoing recovery in the housing market and the economy as a whole,” wrote Mr. Thomas.

The NAR letter doesn’t stop there. It also argues that Fannie and Freddie—at the FHFA’s direction—shouldn’t continue to increase the guarantee fees that the firms charge lenders, which are often passed onto borrowers in the form of higher mortgage rates.

The Obama administration and the FHFA have argued that higher guarantee fees and lower conforming loan limits could both help “crowd-in” private capital to a mortgage market that has been dominated by government-insured loans.

The NAR also asked the FHFA to rescind certain “adverse market” fees that Fannie and Freddie began imposing on loans in 2008, arguing that the housing market’s relative improvement obviates the need for any such fees.

More broadly, the letter raises concerns that increasing guarantee fees might not actually make private capital more willing to compete in the mortgage market, even if it eliminates a perceived price-advantage from government-backed lending. One possible consequence, the NAR said, is that fees move so high that they simply raise borrowing costs without achieving “the intended but possibly unattainable goal of increasing private sector lending in the mortgage market.”

Despite the relative stalemate over what to do with Fannie and Freddie, policy makers and industry groups have said for years that they all believe private capital should play a greater role in the mortgage market. But the NAR’s to-do list shows serious reservations on the part of the real-estate industry of taking immediate steps in pursuit of those goals.

The wish-list also illustrates the challenge facing policy makers: raising the cost of government-guaranteed lending might not necessarily induce a return of private sector lending at the terms currently offered by federally supported entities. The letter is the latest sign that even minor changes to the status quo are going to meet major resistance.

 

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