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.