Bowing to political pressure, Fannie Mae and Freddie Mac say they will greatly restrain the annual increase in the maximum size of loans they buy.

The two mortgage titans said last week that they would hike the maximum by just 3.7% next year, to $214,600 - less than half the increase allowed by law.

The announcements, which followed weeks of negotiation and speculation, came amid increased scrutiny of the agencies' scope and influence.

"It was the politically savvy thing for both of them to do, considering the growing voices to have them pay more taxes and decrease their market share," said Rep. Rick Lazio, R-N.Y.

Fannie Mae, formally the Federal National Mortgage Association, and Freddie Mac, the Federal Home Loan Mortgage Corp., are the hub of the modern mortgage market. They buy home loans from lenders across the country, hold some, and repackage the rest as securities for investors.

Mortgage banking companies, which sell most of their new loans to agencies, said the planned increase in the limits would give only a modest lift to their businesses.

It is "at best a bunt single," said Angelo Mozilo, chairman and chief executive of Countrywide Home Loans, Pasadena, Calif.

But banks and thrifts that compete with the mortgage agencies to invest in home loans expressed satisfaction. A small increase, they noted, preserves the profitability of investments in jumbo loans - those exceeding the agency limits.

"It's good news for us, because the jumbo market is our market," said Claus Lund, head of mortgage asset management at Bank of America.

The loan limit is adjusted annually to reflect increases in an index of home prices calculated by the Federal Housing Finance Board. The index showed that home prices rose 8.4% in the 12 months through October. Thus, under current law, Fannie Mae and Freddie Mac could have raised their loan limits by 8.4% in 1997, to more than $224,000.

Instead, the agencies tempered the increase by factoring in home price declines in 1993 and 1994. The agencies had opted against lowering the limits after the price declines, saying the law did not require reductions.

Freddie Mac chairman Leland Brendsel said last month that his agency would adjust the loan-limit hike for the earlier declines in home prices, although he pointed out in a letter to Rep. Lazio that the lower loan limit meant fewer families would benefit from the secondary market program.

Fannie Mae's chairman, James A. Johnson, had already agreed to a smaller hike.

Had the agencies pursued the maximum allowable increase this year, Congress might well have intervened.

Two key congressmen - Rep. Richard H. Baker, R-La. and Rep. Lazio, who lead oversight subcommittees of the House Banking Committee, - introduced a bill earlier this year that would require the agencies to lower their limits when home prices drop. The measure, which the lawmakers expect to pass next year, would apply retroactively to the price drops earlier this decade.

Even with only a modest increase in the limit, the agencies will remain the undisputed leaders of the mortgage market. This year, for instance, they will purchase or securitize about $300 billion of loans, or about 40% of all new mortgages, says Jonathan Gray, an analyst with Sanford C. Bernstein & Co.

The two agencies will close the year holding about 10.4% of all outstanding mortgages, up from 4.7% in 1988, Mr. Gray said. At the same time, they are repackaging for investors another large chunk of new mortgages.

"Between the (mortgage-backed securities) and the mortgage portfolios, they are far and away the giants of the mortgage market," Mr. Gray said. "They totally dominate it."

The skirmishing over this year's loan limit highlighted a long-running debate over the proper role for the agencies.

By most accounts, Fannie Mae and Freddie Mac have delivered big benefits to consumers. By establishing a highly liquid, national market, the agencies have made home loans cheaper, said Mark Korell, group president of lender and investor services at Norwest Mortgage.

Experts generally say that mortgage rates are about 0.5% lower for loans that meet agency credit standards.

Still, competitors and some policy makers wonder if so many American homeowners need this mortgage subsidy.

"Should millionaires get subsidized rates?" Mr. Korell wondered. "What's the point?"

Mr. Baker of the House Banking Committee has said that Fannie and Freddie's loan limits shouldn't go up every time home prices do unless the private market can't fund those loans unaided.

His view was echoed recently by the Department of Treasury. In a Nov. 25 letter to Mr. Baker, John D. Hawke, under secretary for domestic finance, said "there is no market failure in providing mortgage credit at the upper end of the mortgage market."

"Accordingly, there is no public policy rationale for expanding (Fannie's and Freddie's) reach into a market segment already served by fully private firms," Mr. Hawke wrote.

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