Fed Chairman Bernanke today recommended that any limits on increasing the value of mortgage, for Freddie and Fannie portfolios be temporary, perhaps for two years.
He said many market participants see Fannie and Freddie,securitization and investment companies, as fully government-backed entities, and allowing the companies to buy higher-priced mortgages would extend an 'implied guarantee to another portion of the mortgage market'.
Barnie Frank, House Financial Services Committee chairman, said he thinks the portfolio caps for Fannie and Freddie need to be expanded in order to buy sub-prime mortgages and bring liquidity to that troubled sector of the market.
Bernanke also pledged the Fed would do what it can to mitigate the ongoing crisis in the mortgage market.
However, Bernanke said in his letter this week that Fannie and Freddie 'probably could accommodate some sub-prime borrowers within the conditions of their charter and (consequently) without increasing their overall credit risk'.
Well that's all great. Say what! Fannie & Freddie are looking at expanding their portfolio's by 2% per year. Question is what are they going to do with that capability?
First, it looks like they are going to raise the loan limits to take pressure off of the Jumbo mortgage market mess. That will probably give the housing industry a needed boost. Typically Jumbo rates are about .25% above conforming rates, with all of the recent uncertainty in the secondary mortgage market those rates have risen to at least a full 1% above conforming rates!
In May, the House passed a bill that would let Fannie and Freddie purchase and securitize bigger mortgages in high-cost areas within the continental United States. In areas where the median price exceeds $417,000, Fannie and Freddie could purchase loans up to that region's median price or $625,500, whichever is lower. The limit is already 50% higher - $625,500- in Hawaii, Alaska, Guam and the Virgin Islands because years ago, those outlying areas were considered high cost.
Why not make these guidelines apply everywhere there are high cost areas? Let's get it going.
Second, they appear to be looking at bringing on some sub-prime mortgages. This will help people whose mortgages will be adjusting (about 2 million) in the fourth quarter of 2007 and beyond. These borrowers should still have to meet more rigorous requirements of this market.
The federal regulator for Fannie and Freddie today slightly expanded the portfolio caps in order to allow the purchase of more sub-prime mortgage.
Let's see how quickly this can all be implemented, with adequate controls which will help until the pig works it's way through the snake of the deepening mortgage crisis.
Ever hear of too big to fail? Continental Illinois National Bank and Trust Company?
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