Edward DeMarco, acting director of the Federal Housing Finance Agency, told Zillow and the Bipartisan Policy Center yesterday that Fannie Mae and Freddie Mac (Enterprises) will be reducing the maximum size of loans that the Enterprises guarantee.
Since the FHFA announces conforming loan limits in November, this will be coming shortly. Currently the lowest conforming loan limit is $417,000 with some high cost areas like California, New York, Washington D.C. and others having higher limits. DeMarco said that FHFA will follow its current November schedule but will give further information at that time about potential reductions in the size of loans going forward. “We expect to give market participants at least six months’ notice of any change,” stated DeMarco.
This is the fifth anniversary of the FHFA taking over Fannie and Freddie in conservatorship. He also stated that Fannie and Freddie will cease to operate their their current form at some future date, “a date to be set by Congress.” Therefore FHFA has set forth three broad goals in their "Strategic Plan:”
- Build. Build a new infrastructure for the secondary mortgage market.
- Contract. Gradually contract the Enterprises’ dominant presence in the marketplace
while simplifying and shrinking their operations.
- Maintain. Maintain foreclosure prevention activities and credit availability for new and
DeMarco points out that lowering the loan limits is a direct way to increase private sector participation in the mortgage market and fulfilling #2 above. This participation will reduce the taxpayer exposure to faulty loans. Interestingly, this announcement comes as both Fannie Mae and Freddie Mac, through tighter lending and increased guarantee fees, are profitable and actually bringing money into the Treasury and not taking it out.
With an uncertain future and a general desire for private capital to re-enter the market, the
Enterprises market presence should be reduced gradually over time.” said DeMarco.
The Freddie Mac mortgage market survey for the week also showed yesterday that mortgage rates are continuing to edge downward after spiking in July. The average 30 year fixed rate came in at 4.13 percent. At the same time,new loans are down 21.5% from August to September. Delinquency rates of existing home loans are continuing to decline, adding to the health of the Enterprises.
About the author: Fred Chamberlin was a senior loan officer with Guild Mortgage Company in Oak Harbor. He was in the mortgage origination business for over 20 years and in the lending business for over 30 and authors a number of mortgage related blogs.