Fannie and Freddie Refuse to Reduce Loan Limits: Good News for Housing

Fannie Mae

Fannie MaeThe regulator for Fannie Mae and Freddie Mac announced that it will not be reducing loan limits for the previously bailed out mortgage insurers. The move by Fannie and Freddie to not reduce the loan limits, as was once expected, is a bit of good news for a housing market that has been struggling to recover from the crushing blows it received circa 2008. The latest announcement by the Federal Housing Finance Agency is a departure from the previously agreed upon concept of slowly reducing loan limits and phasing out government exposure in the mortgage industry.

Mel Watt, Director of the FHFA, made statements to the effect that the Housing Finance Agency would be foregoing plans to reduce the scope of Fannie and Freddie’s capabilities. In essence, the move might mean that the credit might flow just a bit more freely through the housing industry. Watt made the announcement in his first public speech, which took place at the Brookings Institution. In the speech, Watt stated that he did not believe it was the responsibility of the FHFA to decide that Fannie and Freddie needed to decrease their “footprint” in the housing market. He further stated that he believed the purpose of the two companies was to insure “broad liquidity” in the area of housing, and to do so in a “safe and sound” way. It appears, by statements made by Watt, that reducing loan limits and cutting back the two companies presence in Housing is not necessary for them to fulfill their purpose.

Fannie and Freddie currently own or back close to 60% of all domestic mortgages. Their sheer size was one of the reasons they were selected as one of many companies to receive bailout monies during the 2008 financial crisis. The two companies were recipients of more than $180 billion in bailout funds, which they have reportedly returned in full. Fannie and Freddie have since even become profitable, showing impressive profits through the first quarter of the year. Fannie Mae posted profits of $5.3 billion while Freddie Mac showed an impressive $4 billion in earnings for the same period.

This coming Thursday, the Senate Banking Committee will be considering a bill which proposes to replace Fannie and Freddie with a private-sector mortgage reinsurer. The plan suggests phasing out the two companies over a five year period, and reorganizing the system to provide federal support only after private insurers were tapped out, in essence significantly reducing or eliminating government exposure in the mortgage market. The bill’s passage is now viewed with high skepticism, as it has been reported that six key Democrats, whose support would be necessary for the bill to pass, have agreed not to vote in its favor.

Fannie and Freddie’s decision to forego the expected reduction in loan limits could spell good news for the housing market, along with shareholders in the two companies. As for the proposed bill, its inability to pass would be welcomed by Fannie and Freddie shareholders like Pershing Square Capital Management, who owns just more than 10% of their shares outstanding. A move in the opposite direction to the proposed phase-out, would spell possible long-term profits for shareholders.

Senate majority leader Harry Reid has stated that the proposed bill would need to gain more Democratic support before he would be willing to bring it to the floor for a vote. All things considered, there is a feeling of pessimism about the prospects of the proposed bill, and the recent announcement by Watt just might spell a little boom in the housing market as the credit taps begin to open up. As usual in the tricky business of predicting the direction of financial markets, only time will tell just how the housing market will react to the outcome of thursdays vote. For now however, Fannie and Freddie’s shares have reacted positively to Watt’s statements, and homeowners along with prospective future owners could be in for looser credit as a result of the FHFA Director’s announcement. To be certain however, one will have to wait and see.

By Daniel Worku


Washington Post