Smaller Fannie Mortgage Limits Unlikely to Fuel Mortgage Bonds

A cut in the size of mortgages that Fannie Mae and Freddie Mac can finance will likely increase banks’ holdings of so-called jumbo loans rather than boost sales of private home-loan securities, a Wells Fargo & Co. executive said.

About $30 billion to $50 billion of additional mortgages that are larger than the government-supported mortgage-finance companies can buy would be written annually if the reduction is put in place, said Anthony “Tuck” Reed, senior vice president of capital markets at Wells Fargo’s mortgage unit.

“The banking system can probably absorb” the amount as individual lenders increase their portfolios of the debt, Reed said today during a panel discussion at the American Securitization Forum’s annual conference in Orlando, Florida. That’s true even though banks’ holdings of residential debt are high by historical standards, he said.

The size of mortgages that Washington-based Fannie Mae and McLean, Virginia-based Freddie Mac can guarantee will drop to $625,500 this year unless lawmakers approve an extension. The companies, which along with other agencies now account for about 95 percent of new home lending, currently can buy or guarantee mortgages as large as $729,750 in high-cost areas.

Congressional approval of a renewal of that limit is unlikely by its September expiration because Republicans have gained control of the U.S. House of Representatives, James Lockhart, the former head of the Federal Housing Finance Agency, said during the panel discussion.

‘Game Changer’

Only one securitization of new U.S. home loans without government backing has occurred in almost three years, a packaging of less than $240 million of mortgages, after sales peaked at about $1.2 trillion in each of 2005 and 2006.

Redwood Trust Inc. Chief Executive Officer Martin Hughes, whose investment firm completed that deal in April 2010, said yesterday at the conference that lowering limits for Fannie Mae and Freddie Mac is a potential “game changer in getting private markets up and going.”

Issuance this year will likely be between $2 billion and $5 billion, though could be as much as $10 billion, Hughes said.

Banks are awash in deposits and unable to find many opportunities to put that cash to work by making new loans, Lockhart, now vice chairman at WL Ross & Co. LLC, said in an interview. An economic recovery that offers more loan demand from other borrowers would reduce banks’ desire to take on more jumbo mortgages, Reed said.

A decrease in Fannie Mae and Freddie Mac loan limits would be a “test balloon” for the ability of private markets to handle more new home lending, said Ryan Stark, a director at Deutsche Bank AG’s securities unit. Until the future of the companies and other planned regulations get decided, the mortgage-bond industry will be challenged, he said during the panel today.

“It’s really, really hard to see much in this market before you define what this market is,” Stark said. “There’s strong demand for paper but I don’t think the economics work yet,” he added.

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