Fannie Mae and Freddie Mac must feel like children watching their parents fight. After a bipartisan Senate Banking Committee group rebuked HUD Secretary Henry Cisneros in a Dec. 7 letter over his position on the GSEs loan purchase limits, you might not blame them.
The HUD-senate spat adds another plot twist to the evolving loan limit soap opera, and the latest episode may have taken enough pressure off of the agencies to allow them to keep their limits without fear of HUD repercussions.
The dilemma the GSEs have faced since Dec. 2 was how to handle Cisneros' loan limit lowering request. HUD holds considerable influence over the GSEs and, with the 1995 twin-30 goals just over the horizon, upsetting Cisneros could prove damaging--especially considering the agencies have expressed trouble in meeting the less-onerous 1993 goals.
But the Senate may have provided the GSEs with the support they needed to move freely. A unilateral decision against lowering the limits might have been seen as a profit-protecting move. but a Congressional endorsement for maintaining the limits only bolsters their position.
Fannie and Freddie gauge their loan limit increases on a house price index, but house prices have only declined once since the GSEs began using the index as a benchmark, resulting then in a $150 decrease in their loan limits. Faced with only the second-ever index decrease, Freddie Mac announced it would maintain the current limit of $203,150; Fannie Mae said it hadn't decided whether to lower its limits.
Those responses drew harsh comments from Cisneros who contended that, because the GSEs have always adjusted their limits higher when the index rose, they should lower them when the index drops. In the Dec. 2 news release, Cisneros asked the still-undecided Fannie Mae to lower its limits and also asked Freddie Mac to reconsider its position.
But the Senate Banking Committee didn't see the loan limit situation the same way Cisneros did.
And their arguments are strong enough to allow the GSEs a sigh of relief.
"It is not clear to us how a reduction in Fannie Mae and Freddie Mac loan purchase limit would, as your Dec. 2 news release states ~... improve the housing needs of low- and moderate-income home buyers,'" said the letter.
The committee also said that some families would have to pay an average of 30 basis points more annually to finance their mortgages, amounting to more than $60 a year in additional finance costs for a mortgage at the current limit, or $18,000 over the life of a 30-year loan.
Lowering the ceiling on loan limits could also have a debilitating effect on home buyers in areas where real estate costs are much higher than the national average, particularly in New York, California and New England, something probably on the minds of two of the letter's signers, Sens. Barbara Boxer, D-Calif., and Alfonse D'Amato, R-N.Y.
The group also pdisagreed with Cisneros ~belief that by not reducing Fannie and Freddie's loan limits, the GSEs would be diluting their focus on providing required public-purpose benefits to lower-income borrowers. They believed the opposite.
Other senators who joined Boxer and D'Amato in signing the letter were: Richard Shelby, D-Ala.; Jim Sasser, D-Tenn.; Richard Bryan, D-Nev.; Christopher Bond, R-Mo.; and Connie Mack, R-Fla.
