Lower Mortgage Limits to Spur the Economy, Experts Say

NEW YORK (TheStreet) -- Fannie Mae and Freddie Mac should consider lowering loan limits to allow private players to compete more effectively in the market, a panel on housing finance reform concluded Monday.

Government-sponsored Fannie and Freddie purchase mortgages up to $417,000, though they can buy them for as much as $625,000 in some high-cost areas. The Federal Housing Administration, meanwhile, can purchase loans with a maximum limit of $729,750.

Loans that exceed that amount, called jumbo loans, are typically sold to private investors.

Housing lobbyists argue that lowering the loan limits would make borrowers in high-cost areas pay higher interest rates.

However, the panelists at the American Securitization Forum in Las Vegas were of the opinion that loan limits were much higher than they needed to be and should be reduced as the housing market recovers.

"The pressure to keep loan limits so high has weakened," said Barry Zigas, director of housing policy at the Consumer Federation of America. While the government's involvement with the housing sector goes back 75 years and should not be withdrawn in a hurry, not all borrowers may need the kind of support extended by Fannie, Freddie and the Federal Housing Administration (FHA), he argued.

"Missing from this discussion is what part of the market deserves this support in the form of long-term, fixed interest rates and what does not," Zigas said.

Fannie Mae, Freddie Mac and the Federal Housing Administration now originate nine out of every 10 mortgages.

Reducing government dominance and getting private mortgage credit flowing again has bipartisan support, but the methods remains contentious as policymakers weigh the impact of the withdrawal of government support on the housing market and borrowers.

Still, despite the extraordinary support extended by the government to borrowers in the aftermath of the crisis, first-time home buyers remain largely cutoff from the market due to extremely tight credit standards.

"Most mortgage credit today is going toward wealthy families. Are we diverting government resources to the high end rather than the low end?" asked Patrick Lawler, chief economist at the Federal Housing Finance Agency.

"We want to gradually reduce our presence," Lawler added. "Reducing loan limits might be a possible way to do this."

Experts believe that until private capital re-enters the market, the status quo will remain. So far only a couple of players, notably Redwood Trust (RWT), issue non-agency mortgages with even those largely restricted to jumbo "prime."

-- Written by Shanthi Bharatwaj in New York



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