Mortgage Giants Aim to Reduce 'Jumbo' Rates

"In high-cost areas in particular, a temporary lifting of the conforming loan limit might prevent declines in house prices that could lead to additional defaults," Syron said in prepared testimony.

Fannie Mae CEO Daniel Mudd also said he would support an increase to the limit on conforming loans to help the market for jumbo loans, but he said he would leave it to Congress to determine the level.

Raising the conforming loan limit could also help borrowers with impaired credit refinance out of expensive adjustable-rate mortgages into cheaper fixed-rate loans. Fannie and Freddie buy a limited amount of subprime mortgages, but the Federal Housing Administation and the Veterans Administration, which do cater to subprime borrowers, also face restrictions on the size of loans they can guarantee. And these limits are pegged to the $417,000 cap on loans Fanne and Freddie can buy.

If Congress doesn't act, the conforming loan limit is likely to remain unchanged for at least the next year. It is based on year-over-year changes in a house-price index published by the Federal Housing Finance Board, which is on track to decline slightly for the second year in a row.

Fannie and Freddie are also lobbying for increases in the amount of mortgages they can hold in their investment portfolios.

On Wednesday the Office of Federal Housing Enterprise Oversight, the companies' primary regulator, agreed to relax restrictions on Fannie Mae's investments. Its new policy allows the company to grow its portfolio by 2% a year.

But having the flexibility to grow the portfolio by 10% would allow Fannie to boost liquidity invest in more loans to people who are refinancing out of unaffordable subprime mortgages, Mudd said in his prepared remarks on Thursday.

The Bush administration has previously tried to have stronger regulatory oversight of Fannie Mae and Freddie Mac. But Treasury Secretary Henry Paulson signaled a change in stance at the hearing on Thursday.

"There is little question that allowing [Fannie Mae and Freddie Mac] to securitize jumbo mortgages would give a short-term lift, which would be helpful to a segment of the housing market that has shown some recent improvement but is not functioning as normal," he said in his prepared remarks.

Paulson said, however, that any change should be temporary, and he didn't endorse Fannie Mae's and Freddie Mac's requests to increase their portfolios beyond regulatory limits.

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