OFHEO Questions Mortgage Proposal
Friday, February 8, 2008
Funding one $600,000 mortgage takes as much capital as funding three $200,000 loans, James B. Lockhart III, head of an agency that oversees the federally chartered mortgage companies, told the Senate Banking Committee.
The economic stimulus package passed by Congress last night would temporarily permit District-based Fannie Mae and McLean-based Freddie Mac to buy or guarantee mortgages 25 percent higher than an area's median home price -- to a maximum of $729,750, up from the current limit of $417,000.
The increase would allow the companies to fund bigger mortgages in areas with high housing costs, such as the Washington area, where the median price is $450,000, according to the National Association of Realtors. Advocates have argued it could provide relief to housing markets.
Lockhart, director of the Office of Federal Housing Enterprise Oversight, testified that the change would push the companies deeper into some of the riskiest real estate markets, including parts of California.
Chartered by the government to bring affordability and stability to the housing system, Fannie Mae and Freddie Mac package mortgages into securities for sale to investors, promising to pay the loans if the borrowers default. They also buy mortgages themselves.
Fannie Mae and Freddie Mac have long sought the freedom to fund larger mortgages, and some lawmakers have argued that a uniform limit of $417,000 doesn't make sense given the variation in housing prices across the country.
Until recently, it appeared that any increase in the limit would be coupled with long-stalled legislation giving regulators more power over Fannie Mae and Freddie Mac, such as a bill approved by the House last year.
The downturn in the housing sector and growing concern about the economy could hand them a major legislative victory -- the opportunity to expand their business without new regulatory constraints.
The change "will be a significant and profitable new business" for the companies, said Sen. Charles E. Schumer (D-N.Y.), a member of the Banking Committee.
Freddie Mac chief executive Richard F. Syron countered that setting up new systems to handle the larger loans will cost his company a lot of money and will be "kind of a bear to do."
Lawmakers from both parties have been saying the companies need stricter regulation at least since 2003 and 2004, when multibillion-dollar accounting scandals revealed that Fannie Mae and Freddie Mac had dysfunctional internal controls.