Housing finance experts asks lifting of loan limits

Government and private-sector housing finance experts asked Thursday that a temporary lifting of loan limits for government-supported mortgages be made permanent to help homeowners in high-cost states like California and Florida.

An economic stimulus package passed by Congress in February nearly doubled the value of some loans that could be taken in by quasi-government mortgage financiers Fannie Mae and Freddie Mac. But this lifting of limits on so-called jumbo or non-conforming mortgages is set to expire Dec. 31.

The House Financial Services Committee held a hearing Thursday to ask whether the change should be made permanent. And the message lawmakers got back was yes.

Various players in the mortgage lending chain are reluctant to make major changes in their business practices "for a program that has an uncertain future," said Thomas Hamilton, vice chairman of the Securities Industry and Financial Markets Association, or SIFMA.

Historically, Fannie and Freddie could take in loans valued up to $417,000 only. That value is well below the median home price in many parts of California and the Northeast.

Consequently, homeowners with distressed mortgages in high-cost areas nationwide have had to pay an extra $400 or more a month if they refinanced a jumbo-rate loan. Earlier this year, these loans had an interest rate a full percentage point higher than conforming loans, although this gap appears to have narrowed to a half-percentage point in recent weeks.

The stimulus package sought to address this problem because it allowed Fannie and Freddie to take in loans worth up to $729,750. But witnesses on Thursday said only $80 million worth of jumbo loans have been accepted by Freddie and Fannie since the change.

Because of the temporary nature of the program, investors have refused to allow these high-cost loans to be blended in with other traditional or conforming loans when Fannie and Freddie bundle the mortgages for sale as mortgage bonds.

By insisting that the jumbo loans be sold as a separate class of bonds, investors have demanded a higher interest rate to reflect a greater risk of default by borrowers with high-cost loans.

If the higher loan limits were made permanent, eventually there would be less concern and it could become easier to bundle jumbo loans with conforming mortgages - a process called securitization.

Securitization injects more cash into mortgage finance, lowering the cost of borrowing for consumers. Once a mortgage is issued to a borrower, it is quickly sold into a secondary market where it is bundled with others and sold as a bond. Monthly mortgage payments become the cash flow that pays investors.

Fannie and Freddie are the traditional securitizers, but during the 2001-2006 housing boom, investment banks surpassed Fannie and Freddie in issuing these bonds, called mortgage-backed securities.

Investment banks, however, had much weaker lending standards than Fannie and Freddie and that led to exotic adjustable-rate loans given to the weakest borrowers. These loans are defaulting at record rates, pulling down the value of homes nationwide.

In raising the loan limits, Congress sought to have the Federal Housing Administration take in more distressed high-cost mortgages and have these refinanced loans bundled by Fannie and Freddie for sale to investors as mortgage bonds. Proponents of raising the loan limit permanently hope this process would accelerate.

High-priced California is at the center of this effort to securitize more jumbo loans. There are so many homes for sale right now in the Golden State that it´d take 11.6 months to sell them all off, experts said Thursday.

"Nowhere is the demand (for refinancing jumbo loans) stronger than in the state of California," Heather Peters, the state´s deputy secretary of housing regulation, testified before lawmakers.

Because California accounts for a large slice of the nation´s economy, its housing problems drag down the entire economy.

"What happens in California does not stay in California," Peters said.

Top officials from Fannie and Freddie supported efforts by the committee chairman, Rep. Barney Frank, D-Mass., to permanently raise the loan limits. Only the Mortgage Bankers Association stood opposed, preferring a longer temporary period of a couple of years until the troubled housing market returns to normalcy.

There was also unanimous opposition to a Senate measure that would require the securitization of any jumbo loan. The mortgage finance experts said mandating securitization interfered with market functioning by limiting the flexibility to reject inappropriate loans.

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