Fannie Mae, Freddie Mac will not reduce loan limits, regulator says

The regulator overseeing government-controlled mortgage giants Fannie Mae and Freddie Mac has announced a policy that could make more loan money available to borrowers.

Mel Watt, the director of the Federal Housing Finance Agency, said Tuesday in his first public speech that the agency will not reduce current limits on amounts of mortgages that Fannie and Freddie can purchase. The decision was based on concern that a reduction could negatively affect the health of the $10 trillion housing-finance market, he said.

Watt's predecessor, Edward DeMarco, had floated the idea of reducing the maximum loan limits.

The government rescued Fannie and Freddie during the financial crisis in 2008. They received total taxpayer aid of $187 billion, which they have since returned. The companies finance about 60 percent of U.S. mortgages issued.

The current loan limits are $417,000 and $625,500 in high-cost areas of the country. The proposal put forward by DeMarco in December would have reduced the limits by about 4.1 percent, to $400,000 and $600,000 respectively. The goal behind the plan was to reduce Fannie and Freddie's presence in the housing market and limit their exposure to the risk of mortgage default, the FHFA said at the time.

Watt, in his speech at the Brookings Institution in Washington, said the decision not to cut loan limits "is motivated by concerns about how such a reduction could adversely impact the health of the current housing-finance market."

President Barack Obama has proposed a broad overhaul of the mortgage finance system that includes gradually winding down Fannie and Freddie. They would be replaced with a system that putting the private sector, not the government, primarily at risk for the loans.

Legislation to phase out Fannie and Freddie, and instead use mainly private insurers to backstop home loans, has advanced in Congress. The Senate Banking Committee is scheduled to vote on it on Thursday. The plan, crafted by two key senators, has been endorsed by the White House. But the opposition of six Democratic senators on the committee means the legislation likely will be only narrowly approved, and its prospects for a vote by the full Senate are weak.

Watt also announced in his address a pilot program involving Fannie and Freddie in Detroit that will allow for more generous revisions in the terms of mortgages held by struggling borrowers.

The FHFA plans to eventually expand the program to other parts of the country, Watt said.

The mortgage banking industry welcomed Watt's remarks. "Director Watt is showing that he has hit the ground running and put a lot of thought into the path he intends to take" with Fannie and Freddie, David Stevens, president and CEO of the Mortgage Bankers Association, said in a statement.

DeMarco, who had been appointed by President Bush and was the FHFA's acting director, resisted pressure from the Obama administration to allow Fannie and Freddie to reduce principal for borrowers at risk of foreclosure. He stirred persistent opposition from Democratic lawmakers and attorneys general in a number of states.

Obama's nomination of Watt, a longtime Democratic congressman from North Carolina who was a senior member of the House Financial Services Committee and a former chairman of the Congressional Black Caucus, was stalled for months by Republican lawmakers. Watt finally was confirmed by the Senate in December and became FHFA director in January.