Big Players Call On OFHEO to Rethink GSE Decision

Several key players have rung in on the decision by the Office of Federal Housing Enterprise Oversight (OFHEO) to retain limits on the mortgage portfolios owned by Freddie Mac and Fannie Mae.

The two government sponsored enterprises (GSEs) had petitioned OFHEO, its regulator, last week asking to be allowed to raise those portfolio ceilings in order to offer some relief to lenders in the current mortgage credit crunch. Both the head of OFHEO James Lockhart, III and President Bush stated that the GSE's should clean up the remainder of their accounting problems dating back to 1994 before they are allowed to increase the size of their portfolios. The President also said that the free market was better suited to handling the current crisis than were Freddie and Fannie.

This week the Mortgage Bankers Association (MBA), the National Association of Home Builders (NAHB) and the National Association of Realtors® (NAR) sent a letter to OFHEO urging the agency to take action to temporarily increase the caps on the GSE portfolios "'with appropriate controls,' to inject needed liquidity and stability into the mortgage market."

According to a press release issued by the MBA, the joint letter states that "The nation's mortgage markets are facing a liquidity crisis of a force and magnitude not seen in decades. The chill will have far reaching effects throughout the housing market if stability is not restored. A temporary increase in the allowable size of the GSEs' loan portfolios for the purpose of easing this credit crunch would help stem the crisis.

"An increase in the portfolio caps should be appropriately targeted to assure that GSEs use the increased capacity to help lenders meet the most urgent credit needs, including the private label mortgage-backed securities (MBS) market and mortgages for creditworthy families who would otherwise find it difficult or impossible to obtain a mortgage loan. The authority should be consistent with safety and soundness and include appropriate conditions concerning how long this new capacity will be available to the GSEs, the specific size of the increase, the types of assets eligible for purchase, appropriate reporting and monitoring provisions, and a reasonable schedule for returning to the current limits to avoid future disruptions to the mortgage market.

"Quick and reasonable action is urgently needed to provide liquidity and stability to the mortgage markets and to serve the financing needs of America's current and aspiring homeowners."

Also weighing in was Senator Charles Schumer (D, NY), a member of the Senate Banking, Housing, and Urban Affairs Committee. On Tuesday the Senator wrote to James B. Lockhart urging him to temporarily raise the limit on purchases of home loans by the GSE's. Then with the announcement that the nation's largest mortgage lender, Countrywide, had drawn on and perhaps even drained its huge emergency credit facility coupled with bad news on housing starts and permits coming from the Census Bureau and the Department of Housing and Urban Development, Senator Schumer renewed his call that Fannie Mae and Freddie Mac to allowed to ease the liquidity concerns in the mortgage markets.

"We cannot afford a 'wait and see' approach when it comes to a credit crisis that threatens to derail our economy," said Schumer in a press releases on his website. "The Bush administration continues to ignore one tell-tale sign after another that the subprime woes are threatening the broader mortgage markets. Fannie and Freddie are uniquely positioned to inject badly needed liquidity into the economy, but the President won't let them do their job. These companies need their caps lifted now. If the Bush administration won't act, we will."

Schumer said that "Liquidity is virtually nonexistent for loans that do not conform to Fannie and Freddie's portfolio standards (e.g., "jumbo" loans), which is hurting current and aspiring homebuyers' ability to access lending."

If the regulators do not take action to allow Fannie Mae and Freddie Mac to perform their critical role as market stabilizer, Senator Schumer said he would introduce legislation in September to temporarily raise the portfolio caps. "This emergency measure is not only important to restore confidence in the mortgage market for current and aspiring home buyers, but it would also allow Fannie and Freddie to engage in subprime foreclosure relief efforts across the country before the 'October surprise' of subprime resets further shocks the mortgage markets."