WASHINGTON - In a surprise move, the Department of Housing and Urban Development asked Fannie Mae and Freddie Mac to reduce the maximum size of home loans they will buy next year. There was no word from the agencies on whether they would comply.
Previously, Freddie Mac said it would stick to its current limit of $203,150, despite a 3% drop in the index used to set the ceiling. Fannie Mae said it was leaning toward the same decision, but wanted to study the issue.
"We don't expect to have further comment until we finish our review," said a Fannie Mae spokesman, David Jeffers, when told of HUD's request.
A Freddie Mac spokesperson said the company's chairman, Leland, Brendsel, would not comment until he had spoken to HUD Secretary Henry G. Cisneros.
If the agencies were to follow the index and revise their ceilings downward, the largest loans they could buy would fall to $197,100.
In its statement, HUD linked the loan ceilings to the agencies' charter to serve low- and- moderate-income borrowers. By not cutting the loan limit when housing prices go down, the companies "dilute" the benefits they are required to provide to lower-income borrowers, Mr. Cisneros said.
Housing activists and some in the thrift industry were quick to applaud the department's request. But mortgage bankers, who would benefit most from existing ceilings, urged the companies to leave the ceilings unchanged.
The companies "are well within their authority to accept [HUD's] advice, but do what they want," said Robert M. O'Toole, senior staff vice president at the Mortgage Bankers Association of America.
"We urge [Fannie and Freddie] to do the right thing, hold the course and don't lower" the loan limits, Mr. O'Toole said.
HUD's stance is "symbolic, because loan limits are so high already," said housing advocate Gail Cincotta of the National Training Information Center in Chicago.
But "if Henry Cisneros didn't take a stance, it would be against what HUD is supposed to be doing - monitoring the [government-sponsored enterprises] and supplying affordable housing," she said.
"I do want to commend the Secretary ... for coming up with the right answer," said Lou Nevins of the California League of Savings Institutions. "These companies receive huge subsidies. HUD should aggressively do everything it can [to see] that they do much more in lower-income areas."
Another Issue Tackled
"It could be an opening step in a dance of negotiation to improve Fannie and Freddie's compliance with lower-income goals," the source said.
In its statement, HUD tackled another contentious issue. It suggested that it does not accept the agencies' argument that because the law governing the loan limits addresses only increases in the ceiling when the index goes up, they do not need to lower the ceilings when it goes down.
"An index is an index," said Mr. Cisneros in the statement. "When the house-price index moves up, as it has in 12 of the 13 years the enterprises have been required to use it, Fannie Mae and Freddie Mac have increased their conforming loan limits.
And when it moves down as it has this year, they should reduce their loan limits."