Editor: David Reiss
Brooklyn Law School

September 19, 2013

Reiss on Fannie/Freddie Loan Limits

By David Reiss

Law360 quoted me in Time May Not Be Right To Limit Fannie, Freddie Loans (behind a paywall).  It reads in part,

The Federal Housing Finance Agency has proposed lowering the maximum size of the loans Fannie Mae and Freddie Mac can purchase as part of an effort to attract more private-sector lending, but some experts warn that other market factors including rising interest rates will keep private lenders from filling the gap.

The FHFA announced earlier this month that it planned to reduce the maximum size of home mortgage loans eligible for backing by the government-sponsored enterprises. The move is part of the agency’s strategic plan of slowly backing away from the mortgage market and encouraging private capital to take its place. But some real estate attorneys and practitioners say private lenders need more than customers to convince them to take the plunge.

Many other environmental factors affect private lenders’ decisions about whether to enter the residential mortgage market, said Bob Bostrom, a shareholder of Greenberg Traurig LLP and former counsel to Freddie Mac.

Reducing the number of loans eligible for Fannie and Freddie backing and raising guarantee fees — another recent tactic — sound good in theory, but they don’t change the fact that the interest rate for a 30-year fixed-rate mortgage rose a full percentage point over the past several months and the housing market dipped correspondingly, Bostrom said.

“The housing recovery is extraordinarily fragile right now,” he said.

The steps the FHFA is taking to reduce the GSEs’ size and scope will work only when there’s a private sector ready to step in, experts say. Until then, these measures can only push the housing market backward, they warn.

* * *

Not everyone is convinced of this dark forecast, however. David Reiss, a Brooklyn Law School professor and real estate finance scholar, told Law360 on Thursday that he’s not convinced the FHFA’s moves will have a negative effect.

Although the pullback should be gradual, it must be done, because the government can’t continue to hold up the mortgage market indefinitely, he said.

Reiss says current market factors actually favor weaning borrowers off Fannie and Freddie, noting that private capital in the sector has increased — particularly in the market for jumbo loans — and that the overall housing market has stabilized.

“We’re past the immediate crisis,” he said. “There’s nothing going on right now that makes me think a downward adjustment in conforming loan limits won’t be met by an increase in capital from private lenders,” Reiss said.

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