July 28 (Bloomberg) -- Limits on the size of mortgage loans backed by the U.S. government can return to pre-crisis levels without hurting the still-fragile housing market, Housing and Urban Development Secretary Shaun Donovan said.
“We continue to be convinced that this is the right step to take now and that it’s not going to have a major impact on the market going forward,” Donovan said in an interview with Bloomberg Television’s “Conversations with Judy Woodruff,” to be broadcast this weekend.
Mortgages worth up to $729,750 can be insured by HUD’s Federal Housing Administration and government-controlled mortgage companies Fannie Mae and Freddie Mac -- which together guarantee about 90 percent of all U.S. home loans. The cap, which was temporarily raised by Congress in 2008, is set to revert to $625,500 on Oct. 1.
“The loan limits were raised because of the crisis. We have to go back, and we have to get started on that,” Donovan said.
Donovan said the housing crisis is the worst the country has ever seen. He said government efforts to stabilize home prices have helped, but not enough.
“The administration’s programs have had a real positive impact, but they haven’t gotten us to where we need to be, which is on a full recovery, and we clearly have more work to do to get there,” he said. “The damage was deep, enormously deep.”
Donovan said a settlement agreement being negotiated by the federal government, state attorneys general and banks over errors in loan servicing and foreclosures will force banks to help distressed homeowners with reduced loan principal, lower interest rates and billions of dollars in other aid.
“One of the most significant things that we face is borrowers who are underwater, homeowners who owe more on their homes than their homes are worth,” Donovan said. “This is an area where I think, with the settlement, we can make real progress.”
A final deal, which is weeks away, will have “real teeth,” he said.
Adding to the system’s woes is a limited supply of capital and lender caution that is preventing even qualified would-be homebuyers from getting loans. Since 2008, lenders and the government, including FHA, have restricted the availability of low-cost, easy credit. A Dodd-Frank Act provision to establish national standards for “super safe” mortgages could further restrict lending by, for example, requiring homebuyers to make a 20 percent downpayment on a loan.
“I do have concerns that that may be going too far,” Donovan said. “What I want to avoid is government making one-size-fits-all rules that, while they save a few loans, is going to block a lot of other people out of homeownership.”
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