OFHEO: GSEs and Jumbos Don’t Mix

Taking aim at proposed legislation in both the U.S. House of Representatives and the Senate, the Office of Federal Housing Enterprise Oversight said Friday that allowing Fannie and Freddie to purchase jumbo mortgages would have a negative impact on both mortgage borrowers and on Fannie Mae and Freddie Mac.

In May 2007, the House of Representatives passed HR 1427, the Federal Housing Enterprises Reform Act of 2007, while in September 2007, Senator Charles Schumer (D-NY) introduced S 2036, the Protecting Access to Safe Mortgages Act.

While there are differences between each bill, both would allow the GSEs to purchase jumbo mortgages above the current conforming limit of $417,000.

OFHEO said that “newly eligible mortgages originated in high-cost areas might pose greater credit risk on average than loans now purchased by Fannie Mae and Freddie Mac,” which would lead to even further hikes in GSE guarantee fees. Both GSEs have hiked their so-called g-fees in recent months in response to deteriorating industry conditions.

Further increases would likely have the effect of reducing available credit to borrowers during a time when more credit availability is what is ultimately needed, according to the report.

The GSE regulator also questioned whether allowing the GSEs to purchase jumbo mortgages was in line with either Fannie or Freddie’s mission:

If a family spent 25 percent of its income on the principal and interest payments on a 30-year mortgage of $417,000 with an interest rate of 6.25 percent, the family would have an annual income of more than $123,000. Clearly, the current conforming limit is capable of serving many households with incomes thought to be high under most other government programs. A loan limit that was 50 percent higher—$625,500—would be serving families with incomes of $185,000 or more.

Finally, alluding to the capitalization problems that have plagued both Fannie and Freddie as of late, the OFHEO letter said that allowing the GSEs to purchase jumbo mortgages would absorb more capital than purchases of smaller loans — which could further stress the capital structure of each GSE at a time when concerns over capital sufficiency have lead each to issue new debt, in a bid to meet federally-mandated and OFHEO-imposed capital requirements.

“A $500,000 mortgage owned or guaranteed by Fannie Mae or Freddie Mac would require twice as much capital for regulatory purposes as a $250,000 mortgage,” the letter said.

For more information, visit http://www.ofheo.gov.

Disclosure: When this post was published, the author held no positions in either FNM or FRE.