Tuesday, August 7, 2007

Fannie asks regulators to raise financing cap

Fannie Mae has reportedly asked the Office of Federal Housing Enterprise Oversight (OFHEO) to increase the maximum amount of loans it can hold in its portfolio. Fannie says this will help stabilize the market and provide financing for potential home buyers. The mortgage giant is required to keep mortgage holding at or below $727 billion. Freddie Mac, Fannie’s smaller sibling, is also subject to a similar limitation. Shares of Fannie Mae gained more than 10% on the news and closed at $62.50 on Monday.

Regulators generally try to prevent the two GSEs from controlling too large a part of the market, because of the potential consequences for the broader economy. Allowing Fannie to keep more loans in its portfolio, or raising the cap on ‘conforming’ loans would probably be good for the market, but I don’t think regulators find the thought of permitting Fannie and Freddie to grow even larger very appealing. It’s a well-known fact that in some areas nearly all loans are ‘jumbo’ because the median is well above the $417,000 limit for a ‘conforming’ loan financed by Fannie Mae, so there must be something inherently wrong with the classification in general. While setting ‘local’ limits for ‘conforming’ loans sounds impractical, there must be something that can be done to make the system more realistic.

Another thing that could help spur the market would be a rate cut, but choosing the right policy in the current circumstances is a very complex problem which the Fed will have to resolve on its meeting this week. Most analysts believe that the Fed fund rate will remain at 5.25% where it’s been for more than a year, but a cut is likely sometime by the end of 2007. Much will depend on how the economy behaves, including such indicators as inflation, employment, the dollar, and the whole range of housing-related problems. Housing prices are another concern that needs to be addressed. They grew beyond any reasonable limits during the housing boom, so in the long term, a drop in prices would be considered a good thing. Providing more financing, or cheaper financing, would only slow that process down.

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