A powerful lenders' trade group is hoping to prevent two key government housing agencies from raising their loan limits in what critics say is an attempt to "force" adjustable-rate mortgages on a public that overwhelmingly prefers fixed-rate loans.
The U.S. League of Savings Institutions is trying to convince the Federal National Mortgage Assn. and the Federal Home Loan Mortgage Corp. that the two agencies should not raise the limits on the size of the loans they buy from lenders.
Officials of the U.S. League--which includes some of California's biggest lenders--also have taken their case to Congress, but so far have had little luck in getting their proposed changes made.
Fannie Mae and Freddie Mac are key players in the nation's housing market, even though most home buyers don't understand exactly what the two agencies do.
Both were formed by Congress to make more mortgage money available to home buyers and to lower the cost of borrowing by creating a "secondary market" for mortgage loans.
They purchase loans from lending institutions, which gives the institutions the money they need to make new mortgage loans to home buyers. Fannie Mae and Freddie Mac then "pool" the mortgages they purchase and repackage them into different types of securities for investors.
Currently, Fannie Mae and Freddie Mac are not allowed to purchase a loan of more than $133,250. Some lenders simply refuse to make loans for more than that amount because they couldn't sell the loans to the two agencies.
Many others make only adjustable loans over that amount because their ability to raise the interest rate on the loan allows them to pass along most of their risk to the borrower.
For each of the last six years, the loan limit has been raised so that Fannie Mae and Freddie Mac can keep up with the rising cost of housing. Without those annual increases, the two agencies would be stuck with a 1979 loan limit of $75,000--a ceiling which would effectively knock the two firms out of California, the East Coast, and many regions in between.
Raising the Limit
If the two agencies weren't operating, people who wanted to buy a more expensive home could find it difficult and more costly to obtain a loan. A loan they could obtain would likely have an adjustable rate instead of one that's fixed.
The next increase--which would take effect Jan. 1,--would likely raise the current $133,250 ceiling to between $150,000 and $160,000.
If the limit is raised to $150,000, according to estimates by the California Assn. of Realtors, about 75% of all loans in this state could continue to be sold to Fannie Mae and Freddie Mac. But if the limit is frozen, only about 60% could be sold to the two agencies.
"In California alone, you're talking about 85,000 households that wouldn't have a choice of a Fannie Mae loan next year if the freeze goes through," says Joel Singer, CAR's chief economist. "That's 85,000 people who are going to pay a higher interest rate, and they might not be able to qualify for a fixed-rate mortgage at all."
The U.S. League says it wants the current limit frozen--at least temporarily--until the index used to calculate the annual adjustment is re-examined.
More Government Involvement
Dennis Jacobe, the league's research director, says his trade group is opposed to the increase for several reasons. He points out that the index doesn't take into account regional variations in the cost of housing, and claims that raising the ceiling encourages more government involvement in the housing industry.
In turn, he says, the government is "crowding out" some private-sector lenders and firms that compete with Fannie Mae and Freddie Mac.
"This is a case where you've got the government doing something that could be done very efficiently by the private sector," Jacobe says. "If the limits are raised, you're encouraging further government involvement."
Jacobe also says Fannie Mae's and Freddie Mac's purchase of large loans "amounts to subsidizing high-income buyers," in part because the two agencies are linked to the federal government.
Investors who purchase securities issued by the two agencies are willing to settle for a smaller return on their investment because the securities have an implicit government guarantee. These lower rates trickle down to home buyers.
"If the limits are raised to $150,000 or $160,000, you're talking about people who are buying pretty expensive homes," Jacobe says. "I think there's a real question here about whether the federal government should be subsidizing those (high-income) home buyers."
But the U.S. League's efforts to defeat the annual increase is drawing fire from realtors, home builders, and even some dissident lenders.