WASHINGTON (Reuters) - U.S. lenders will get at least six months’ notice before the government reduces the limit on the size of loans that taxpayer-owned Fannie Mae FNMA.OB and Freddie Mac FMCC.OB can back, the firms’ regulator said on Thursday.
The Federal Housing Finance Agency, which has already said it was considering lowering the cap to wean the housing finance system off its dependence on the government, said any change would be phased in to avoid economic disruptions.
“We are not making a change there in the immediate term,” FHFA Acting Director Edward DeMarco told reporters. “We’re not looking to disrupt the market or create some sudden dislocation. Anything we would do would have a long lead time and be gradual and measured.”
The housing finance industry had expected officials to lower the limits on Fannie Mae and Freddie Mac-backed loans on January 1, 2014. While it will get more time to prepare for any changes, a decision on whether to lower the limits, and by how much, would still be made in late November, DeMarco said.
Currently, Fannie and Freddie cannot back loans of more than $417,000 in most markets, although the cap ranges as high as $625,500 in some pricier areas - including Washington, D.C., California and the New York City area - and up to $721,050 in Hawaii.
Separately, DeMarco said disputes between financial institutions and the government-run mortgage finance firms on loans made before the financial crisis are on track to be settled by the end of the year.
“We’ve been making progress on getting the claims resolved and settled,” DeMarco said. The firms are sorting through delinquent loans for signs of any violations of representations and warranties.
Lowering the caps, which were raised in 2008 to help keep the mortgage market liquid during the financial crisis, could make it harder for Americans to obtain home loans and drive up mortgage costs, unless the private market steps in to fill the void.
Investors’ willingness to take on more risk once the government retreats could prove to be an early test of how well the housing market can operate without a large federal guarantee.
Fannie Mae and Freddie Mac together have drawn nearly $190 billion in taxpayer aid since they were seized by the government in September 2008, but they have paid about $146 billion to the Treasury in dividend payments in return for the support.
Republicans and Democrats agree the firms should eventually be wound down, but have yet to resolve disagreements over what should replace them and how extensive a role the government should play in supporting housing. The Obama administration also wants to reduce taxpayer backing in the housing system.
The two firms do not directly make loans. They purchase mortgages from lenders, which they either keep on their books or bundle into securities that they offer to investors with a guarantee. Those investors pay Fannie and Freddie a “guarantee fee” when they buy the securities.
The guarantee Fannie and Freddie provide makes it easier for the companies to package and sell mortgage bonds to investors.
Some housing industry leaders have said they are concerned a move to lower the loan limits could come too soon, impeding the housing recovery and shutting out home buyers. Investors might not be willing to take the risk of buying securities without a government guarantee, they caution.
“I recognize and understand that the industry is very busy right now,” DeMarco said. New loan regulations that are part of the Dodd-Frank Wall Street reform law, some of which take effect in January, are often cited as restricting mortgage lending.
The industry has pushed FHFA to delay any lowering of the loan limits. The FHFA said in August it was considering reducing them and has been thinking about when any changes should take effect.
“The industry had an awful lot going on on January 1. The better course was to wait,” DeMarco said.
Some in the industry and lawmakers have tried to challenge the FHFA’s legal authority to reduce the loan limits. In addition, a bipartisan group of lawmakers in the House of Representatives this month called on the agency to drop its plans to change them.
Reporting by Margaret Chadbourn; Editing by James Dalgleish and Dan Grebler