Treasury Secretary Advocates GSE Assistance for High-End Borrowers

Treasury Secretary Henry Paulson announced Monday that he was in favor of temporarily lifting the dollar limit on loans purchased by Freddie Mac and Fannie Mae, allowing them to provide a market for so-called "jumbo mortgages."

Under current rules, the two government sponsored enterprises (GSEs) cannot purchase loans that exceed $417,000. Paulson is advocating that this limit be lifted and appeared not to disagree with earlier suggestions by Federal Reserve Chairman Ben Bernanke that the new limit could be as much as $1 million. Paulson stressed, however, that he did not favor raising the loan limits forever, only until the current credit crunch eases.

Such a change, Paulson said, may help "jump start" the market for the largest home loans and would be part of a package of legislative changes which the administration has long sought to reform federal regulation of the two corporations by strengthening the Office of Federal Housing Enterprise Oversight.

Paulson suggested the changes during a speech in Orlando, Florida which is part of a three-state swing to quiet critics who have said that he did not act quickly enough to aid borrowers at risk of defaulting as their home values dropped and their interest rates reset.

The Treasury Secretary, however, did not address other limits on the GSE's lending ability. Freddie and Fannie are both working under caps on their portfolios which they say are hampering their ability to assist borrowers and lenders in the current credit crisis. Under the current rules Freddie and Fannie can facilitate the sale of mortgage loans to secondary market investors but cannot keep loans for their own portfolios above a level tied to their capital reserves. At first glance it would seem that increasing the limits on individual loans would mean that the GSE's would be able to fund fewer loans before hitting those portfolio caps.
The Treasury chief rejected recent suggestions by former Fed Chairman Alan Greenspan that government money be used to rescue Americans at risk of losing their homes. "This program is attempting to prevent a market failure and do so without government money," he said. "We are not touching the contracts in place."