NEW YORK (TheStreet) -- The Federal Housing Finance Agency, regulator of bailed-out housing finance companies Fannie Mae (FNMA) and Freddie Mac (FMCC), is seeking comments on a plan to gradually reduce the size of loans that the companies purchase from lenders.
The FHFA has been contemplating reducing so-called loan limits as part of a plan to reduce the government footprint in the mortgage market and incentivize private capital to return to the market.
Lowering the loan limits would "modestly reduce Fannie Mae's and Freddie Mac's business at the high end of the market, invite private capital to re-enter the market, and limit taxpayer exposure to losses."
In areas where the statutory maximum loan limit for one-unit properties is $417,000, the plan would set the purchase limit at $400,000, a 4% decrease. The loan purchase limit will be reduced by the same percentage in other parts of the country. In high-cost areas where the loan limit is currently $625,500, the limit will drop to $600,000 under the proposal.
Fannie Mae and Freddie Mac, along with the Federal Housing Administration, now own or guarantee about 90% of the new loans originated in the country, which means changes in their policies have a big impact on the mortgage market.
Housing lobbyists fear that reducing the size of the loans purchased by Fannie and Freddie may be premature, concerned that the housing recovery is still fragile and lacking certainty that private capital will re-enter the market.
But the FHFA clarified that any modifications to loan limits will factor in public inputs. "The contemplated action is a plan and not a final decision. The requested public input will be carefully reviewed before FHFA decides whether and how to proceed with the planned approach to Freddie Mac's and Fannie Mae's loan purchase limits," the regulator said in a statement. The proposed changes will not affect loans originated before Oct 1, 2014.
Last week, the FHFA said the agencies would raise the fees charged to lenders for guaranteeing loans, known as g-fee, by an average of 11 basis points. Raising g-fees has been seen as another way to attract competition and reduce the dominance of the government-sponsored enterprises.
Still, it is unclear whether the FHFA will move forward on these recent proposals. Last week, the Senate approved the nomination of Mel Watt (D., NC) as head of the FHFA.
Watt would be the first permanent director of the regulator since 2009. Unlike the non-partisan acting director Edward DeMarco, who has been focused on contracting the market presence of the agencies, Watt as a Democrat is expected to be slower in raising g-fees or reducing loan limits and more likely to preserve the status quo.
Separately, the FHA also said recently that it would reduce loan limits in high-cost areas from $729,750 to $625,500, in a move to scale back its presence in the housing market.
-- Written by Shanthi Bharatwaj in New York.