Fannie Mae Loan-Limit Reduction Sought by FHFA to Cut Footprint

The U.S. regulator of Fannie Mae and Freddie Mac is seeking comment on a proposal for cutting the maximum size of loans the mortgage-finance firms can buy as part of an effort to shrink their footprint in the market.

Loan limits would shrink to $400,000 from $417,000 in most areas under the Federal Housing Finance Agency plan released for public input today. The maximum would drop to $600,000 from $625,000 in high-cost areas such as New York City and Washington, D.C., under the FHFA plan.

Reducing the limits “would modestly reduce Fannie Mae’s and Freddie Mac’s business at the high end of the market, invite private capital to re-enter the market and limit taxpayer exposure to losses,” the agency said in a statement.

President Barack Obama called for a decrease in August, citing the government’s outsize role in the housing market. It’s unclear whether the proposal will be put into effect, given that U.S. Representative Mel Watt, the North Carolina Democrat confirmed last week as the agency’s director, hasn’t said publicly whether he believes loan limits should be reduced.

The proposal, written under the leadership of outgoing FHFA Acting Director Edward J. DeMarco, wouldn’t affect loans originated before Oct. 1, 2014, according to the statement.

Fannie Mae and Freddie Mac, which have operated under U.S. conservatorship since they were seized in 2008, buy about two-thirds of new home loans and package them into securities on which they guarantee payments of principal and interest.

Lowering loan limits could make borrowing more costly for some home buyers. Conforming loans, those eligible for purchase by the U.S.-owned companies, are generally less expensive than larger mortgages known as jumbos because the government would absorb the cost of default.

Trade groups including the National Association of Realtors, the National Association of Home Builders and the Mortgage Bankers Association have been asking that the limits be kept at current levels.

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