DeMarco Announces Six Month Notice for Loan Limit Changes

While notrndirectly acknowledging the protests that have come from both the public andrnprivate sectors about his decision to unilaterally lower loan limits, Edward J.rnDeMarco, acting director of the Federal Housing Finance Agency (FHFA) backedrnoff a bit in a speech on Thursday.  rnDeMarco announced last summer that limits on the size of loans eligiblernfor purchase or guarantee by Freddie Mac and Fannie Mae (the GSEs) would bernreduced from their current limits.    </p

FHFA and itsrnpredecessors traditionally announce new, almost always higher, loan limits inrnNovember, to be implemented at the first of the following year. The currentrnlimit of $417,000, has been renewed each year since the beginning of thernfinancial crisis however the ceiling on county-by-county exceptions for highrnvalue areas was lowered in 2012 to $625,500. </p

DeMarco, inrna speech before Zillow and the Bipartisan Policy Center said he understands the potential timing issues associatedrnwith a change in limits given the other regulatory changes taking place at thernsame time.  Therefore, while FHFA willrnfollow the usual November timetable in announcing 2014 conforming loan limits,rnit would provide six months’ notice before implementing the change.  Any reduction would be across the board, hernsaid, not just in some parts of the country.  rnThe agency will also provide further information in November onrnpotential reductions in the size of loans the GSEs will guarantee goingrnforward. </p

The timingrnchange had been rumored earlierrnthis month after DeMarco was strongly criticized by many industry groups,rnincluding the National Associations of Realtors and Home Builders for therndecision and the legal basis of his authority questioned.  Thirteen members of the Senate also sent arnletter earlier this month challenging him to demonstrate his authority to raisernthe limits and provide an analysis of the impact of such action.   </p

DeMarco saidrnthat while ideas about timing and methods vary, there is a general desire amongrnstakeholders to reduce government’s footprint in mortgage financing andrnencourage private capital to reenter the market.  Lowering loan limits is just one of the toolsrnFHFA has to accomplish this objective, he said.</p

A second method is to increase GSE guarantee fees whichrncurrently average 50 basis points, about double what they were prior tornconservatorship.  Increasing these feesrnbrings their pricing for credit risk closer to what would be required byrnprivate sector providers. “Whilernthat level is difficultrnto evaluate with precision,” DeMarco said, “I believe we are getting closerrnto a level that would encourage more private sector participation.”  Any additional changes going forward would be measuredrnand gradual so as not torndisrupt markets.</p

The thirdrntool is risk sharing which is important for reducing the taxpayers’ long termrnrisk exposure.  The Acting Director saidrnone of FHFA’s 2013 Scorecard targets is for each of the GSEs to achieve $30rnbillion in risk-sharing transactions and both Freddie Mac and Fannie Mae havernrecently completed securities-based transactions and Fannie Mae laid offrnsubstantial risk to a private mortgage insurer.</p

Goingrnforward, he said, he expects to see other types of transactions such as senior/subordinated structures for certainrnportions of the Enterprises’ mortgage guarantees.  Thesernalternative approaches will contribute to efforts to build for thernfuture by helpingrnto develop a securitization infrastructure that isrnless reliant on the Enterprises’ traditional GSE securitization model.</p

DeMarco said it is clear the GSEs, whichrnhad a failed business model, will cease to operate in theirrncurrent form at some future date  and FHFA’s strategic plan is designed tornprepare the companies and the marketrnfor that date, while maintaining stability and liquidity from now to then. Thernagency will soon establish multi-year targets for the GSEs to contract thernfootprint, maintain liquidity and borrower assistance, and build for thernfuture. </p

FHFA expectsrncertain assets, functions, and employees atrnthe two companies will bernrepositioned in the private sectorrnby the end of the conservatorships.  In the meantime, each company will need to enhancerntheir core operations thatrnare expectedrnto operate in the marketplace andrnto gradually sell or wind down certain operationsrnnot expected to go forward.rn</p

The GSEs’ retained portfolios have been steadily declining since 2009</band their composition has changed significantly. rnPrior to conservatorshiprnthey were dominated by the GSEs' own mortgage-backedrnsecurities and performing whole loans.  As thosernsecurities have been paid down, and as thernneed to work through delinquent loans increased,rnthe retained portfolios changed from being relatively liquid tornbeing less liquid.</p