WASHINGTON — Lawmakers are trying to figure out why the temporary increase in the conforming loan limit has done little to improve the mortgage market.
The question was a focal point at a hearing held by House Financial Services Committee Chairman Barney Frank on Thursday. At the hearing, Rep. Frank noted that he was "disappointed" that the increase had made such a small impact.
Witnesses generally pinned the problem on timing — the increase to $729,750 only kicked in three months ago and will expire at yearend.
The higher threshold has "not been in effect long enough to have a substantial impact on the housing market," said Vince Malta, the chairman of the National Association of Realtors public policy coordinating committee.
"There's just not enough time to develop an efficient market between now and the end of the year," said Heather Peters, deputy secretary for business regulation and housing for the state of California. "The market cannot develop without certainty."
The House has approved legislation that would make the increase from $417,000 permanent. The Senate Banking Committee, however, has only agreed to move the permanent threshold to $550,000. And though the Senate bill would require Fannie Mae and Freddie Mac to securitize loans that are larger than $417,000, the House bill would permit them to hold those loans in portfolio.
The GSEs "should have the option to securitize but not the mandate," Rep. Frank said.
Executives from Fannie and Freddie agreed, arguing that the ability to buy and hold jumbo loans would bring down borrowers' costs.
"Currently there is little investor demand for securities backed by jumbo mortgages," said Patricia Cook, the executive vice president and chief business officer at Freddie Mac. "By buying for our portfolio, we are able to price more aggressively and bring down rates for borrowers."
Thomas Lund, the executive vice president of Fannie's single-family mortgage business, agreed that jumbo-loan investors are hard to find. He also echoed the other witnesses, saying "the temporary nature of the law is a major hindrance to the development of an efficient, liquid market for jumbo-conforming loans."
Ms. Cook warned that jumbo loans would be harder to get and cost more if the higher limit is allowed to expire at yearend.
"After the first of the year, the affordability and availability of jumbo mortgages will depend on the willingness of Wall Street and depositories to fund them," she said. "As we have seen in the past year, however, Wall Street is not nearly as reliable as the GSEs in times of market disruptions."
But Emile J. Brinkmann, the vice president of research and economics at the Mortgage Bankers Association, said any increase in the conforming limit should include a sunset provision so that private lenders could regain market share when the current turmoil fades.
"We thought that a two-year period would give us enough room to get this up and going again and getting the private-label market back and functioning," he said.
Supporters of the House bill, whose author is Rep. Frank, said the Senate's proposal would not help high-cost markets where housing prices are still out of reach.
The Senate bill "is not enough in my judgment," Rep. Frank said.
"It is essential in any conference … that the House insist on the House position to permanently increase the limit to $729,750 in high-cost areas," said Rep. Brad Sherman, D-Calif., adding that the Senate cap "will deprive hundreds of thousands of people in high-cost areas of the benefits the GSEs are supposed to provide consumers."
Rep. Gary Miller, R-Calif., who distributed a letter signed by every House Republican from California supporting the higher limit, argued that the Senate cap "discriminates against" homebuyers "based on geography."
But other GOP members were unconvinced. Rep. Spencer Bachus, R-Ala., the committee's ranking GOP member, said a higher limit may only increase the risks posed by the GSEs.
"A key question that this committee must ask is whether Fannie Mae and Freddie Mac will be able to continue to support the conforming mortgage market in a safe and sound manner while assuming additional responsibilities in the subprime and jumbo mortgage markets," he said.
"Although these higher loan limits for Fannie and Freddie might help to reassure mortgage lenders and stabilize local markets that have been battered by sharp price declines and record foreclosures, policymakers must be mindful that they also increase the risks for these two companies."
Other Republicans argued that the limit should be lowered to respond to declining house prices.
"Now that prices are coming down a bit to a more accurate, sustainable level, this Congress seems to be trying to prop those prices right back up," said Rep. Scott Garrett, R-N.J.
