WASHINGTON – A component of the government’s tentative economic stimulus package announced Thursday would give an immediate lift to buyers and sellers in higher-priced housing markets.
The package agreed upon by Democratic and Republican members of the House would allow government-sponsored Fannie Mae and Freddie Mac to buy mortgages up to 75 percent more expensive than the current $417,000 limit. The Senate and White House still must sign off on the proposed stimulus plan, which also includes tax rebates.
Raising the limit on so-called conforming loans will allow a larger pool of borrowers to find lower rates when buying a new home or refinancing an existing mortgage.
“It’s good for homebuyers who have prime credit, have some money to put down and can meet tougher underwriting standards that are in place now,” said Guy Cecala, publisher of Inside Mortgage Finance, a trade publication. For homeowners with blemished credit who are struggling to pay their mortgage bills, the change offers little benefit, he added.
House Speaker Nancy Pelosi and Republican Leader John Boehner of Ohio announced the deal in a press conference Thursday.
The higher cap, to be effective until the end of December, would breathe life into housing markets in New York, California and other pricey areas because lenders would feel more comfortable knowing Fannie and Freddie can buy and package the loans into securities that investors consider to be relatively safe.
Fannie and Freddie would be allowed to purchase loans up to $730,000, though that limit would differ based on the median home price in a particular metropolitan area.
The same limits would also apply for loans backed by the Federal Housing Administration, which insures loans made to borrowers with poor credit, though the change would be permanent for FHA-backed loans, which had been capped at $367,000.
The Bush administration has long been critical of how Fannie and Freddie operate, and officials have pointed to the companies’ multibillion-dollar accounting scandals in recent years to bolster their case that Fannie’s and Freddie’s massive mortgage holdings are improperly managed and pose risks to the financial system.
But as the mortgage-market crisis that began last spring has deepened, Democrats have stepped up calls for Fannie and Freddie to back larger loans and hold more of them in their portfolios.
Treasury Secretary Henry Paulson, speaking to reporters after the deal was announced, said he did not support raising Fannie and Freddie’s loan without strengthening government power over the companies.
“I got run down by a bipartisan steamroller,” on the issue, Paulson said, adding that he believes lawmakers would still pursue a broad overhaul of government regulation for the two companies.
James B. Lockhart, director of the Office of Federal Housing Enterprise Oversight – which oversees the two companies – said in a statement that raising the limits for Fannie and Freddie without providing stronger government oversight “would be a mistake.”
Michael Cosgrove, a spokesman for McLean, Va.-based Freddie Mac, said the change “would be in the best interest of the economy and consumers.” Groups representing Realtors, bankers and home builders, which have been hit hard by the mortgage market downturn, have been lobbying for such changes for months. The National Association of Realtors has been pushing for a permanent expansion of the Fannie and Freddie limits. The trade group calculates that borrowers could save $3,000 to $5,000 per year in reduced interest costs as a result and projects up to 210,000 foreclosures could be prevented since refinancing into lower-rate loans would be easier.