(Adds Rep. Barney Frank statement, letter to SIFMA)
By Al Yoon
NEW YORK Aug 14 Fannie Mae and Freddie Mac can
include, but must limit, the number of large mortgages packaged
into bonds in a key part of the market to help contain costs
for struggling U.S. housing borrowers, an industry group ruled
Fannie Mae and Freddie Mac, the largest providers of U.S.
home loan funding, may for the first time use larger loans as
collateral for up to 10 percent of bonds in the first stage of
the $4.5 trillion "agency" mortgage-backed securities market,
an association of bond dealers and investors said.
Shares of Fannie Mae FNM.N and Freddie Mac FRE.N rose
more than 7.0 percent, also bolstered by gains in financial
stocks, analysts said. For stock story, see: [ID:nN14517758].
The decision by the Securities Industry and Financial
Markets Association (SIFMA) follows sweeping U.S. housing
legislation that permanently boosted limits on loans eligible
for Fannie Mae and Freddie Mac programs to $625,550 from the
base of $417,000. Lawmakers expected the bill would make it
easier for more Americans to get a mortgage.
The SIFMA move allows for some loans in excess of the old
limits on eligible loans to be packaged into securities for
sale to investors in the "to-be-announced" (TBA) mortgage bond
market, an important avenue for U.S. lenders to raise money for
The new policy applies to Ginnie Mae as well as Fannie Mae
and Freddie Mac.
The TBA market's liquidity lowers yield premiums and as a
result lowers the mortgage rates lenders can offer on loans
they sell into the market.
"This arrangement preserves the overall homogeneity of the
market while at the same time minimizing the risk of a negative
impact on mortgage rates for lower balance loan borrowers, or,
potentially, all borrowers," said Sean Davy, a managing
director at SIFMA in New York.
Debate over whether to allow the larger loans in the TBA
market, limit the inclusion, or exclude them completely caused
a schism among market participants, sources said.
Including the loans, formerly in the "jumbo" category,
could increase interest rates on smaller mortgages, but
excluding them would reduce the effect that Congress desired in
stabilizing housing markets in costly regions, House Financial
Services Committee Chairman Barney Frank said in an Aug. 12
letter asking SIFMA to allow all large loans be TBA-eligible.
Rates on larger loans made eligible for Fannie Mae and
Freddie mac programs under earlier legislation, but excluded
from the TBA market by SIFMA, remain high, he said in the
"This move should help to reduce the cost of mortgages to
borrowers in high-cost areas without any negative effect on
rates for smaller loans," Frank said in a statement on
Thursday. "We will continue to work with SIFMA on this going
forward, but this is a very important first step."
Traders were concerned that allowing larger loans into the
TBA market would be tampering with a market that has become a
more crucial source of home loan funding since the credit
crunch set in last year. The bonds make up a third of many
"government" mutual funds.
The inclusion of large loans may have an outsized affect on
TBA bonds since investors do not know what collateral is in
their bonds and assume they will receive securities with the
"People in the MBS market are conditioned to shun
larger-sized loans because of their bad prepayment
characteristics," said Nicholas Strand, a strategist at
Barclays Capital in New York. "So I think initially people
thought this could potentially be a bad outcome for TBA."
The larger the loan, the more apt it is to be refinanced
when rates are attractive. Faster-than-expected prepayments
when rates are falling reduce the value of a mortgage-backed
Agency MBSs, which trade separately from the subprime
mortgage bonds that sparked the credit crisis, have slumped in
price since May on concern that capital-constrained investors
like Fannie Mae and Freddie Mac would cut their demand.
Uncertainty over the SIFMA decision influenced the
weakness, though the impact was muted in recent days.
An analysis by Barclays Capital found that even full
inclusion of large loans would have a negligible impact on the
TBA market since only 15 percent of existing jumbo loan
borrowers will qualify under the new loan limits.
Issuers will pool other larger loans into securities, but
they will not be eligible for TBA trading.
(Additional reporting by Lynn Adler and Julie Haviv in New
York, and John Poirier and Patrick Rucker in Washington)