Fannie Mae and Freddie Mac has Announced a Policy That Could Make More Money Available to Borrowers

Posted by Steph Kaye on Wednesday, May 14th, 2014 at 9:53am.


Fannie and Freddie

 

Mel Watt, the director of the Federal Housing Finance Agency, said on Tuesday in his first public speech that the agency will not decrease limits on the amount of mortgages that Fannie and Freddie can purchase. The decision was based on concern that a reduction could negatively affect the $10 trillion housing finance market, he said. Edward DeMarco, who had proceeded Watts, had floated the idea of reducing the maximum loan limits.

The government rescued Fannie and Freddie during the financial crisis in 2008. The companies received a combined taxpayer aid of $187 billion, which they have since repaid. The companies finance about 60% of U.S. mortgages issued.

The current loan limits are $417,000 and $625,500 in high-cost areas of the country. The proposal offered by DeMarco in December would have reduced the limits by about 4.1%, to $400,000 and $600,000. The goal was to reduce Fannie and Freddie's presence in the housing market and limit their exposure to the risk of mortgage default, the Federal Housing Finance Agency said at the time.

Watt, in his speech at the Brookings Institution in Washington, said the decision not to cut loan limits “is motivated by concerns about how such a reduction could adversely impact the health of the current housing-finance market.” President Obama has proposed a broad overhaul of the mortgage finance system that includes gradually phasing out Fannie and Freddie. They would be replaced with a system that putting the private sector, not the government, primarily at risk for the loans.

Legislation to phase out Fannie and Freddie, and instead use mainly private insurers to backstop home loans, has advanced in Congress. The Senate Banking Committee is scheduled to vote on it on Thursday. The plan, crafted by two key senators, has been supported by the White House. But the opposition of six Democratic senators on the committee means the legislation likely will be only narrowly approved, and its prospects for a vote by the full Senate are weak.

Watt also announced in his address a pilot program involving Fannie and Freddie in Detroit that will allow for more generous revisions in the terms of mortgages held by struggling borrowers. The Federal Housing Finance Agency plans to eventually expand the program to other parts of the country, Watt said. The mortgage banking industry were in favor of Watt's remarks. “Director Watt is showing that he has hit the ground running and put a lot of thought into the path he intends to take” with Fannie and Freddie, David Stevens, president and CEO of the Mortgage Bankers Association, said in a statement.

DeMarco, who had been appointed by President Bush and was the Federal Housing Finance Agency's acting director, resisted pressure from the Obama administration to allow Fannie and Freddie to reduce principal for borrowers at risk of foreclosure. He had persistent opposition from Democratic lawmakers and attorneys general in a number of states.

Obama's nomination of Watt, a longtime Democratic congressman from North Carolina who was a senior member of the House Financial Services Committee and a former chairman of the Congressional Black Caucus, was stalled for months by Republican lawmakers. Watt finally was confirmed by the Senate in December and became FHFA director in January.

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