The National Association of Realtors® (NAR) sent a strongly worded letter to Edward J. DeMarco, Acting Director of the Federal Housing Finance Agency yesterday, directed at several issues impacting the cost and potential availability of credit. A particular target of the letter is DeMarco's rumored intentions to lower loan limits for Fannie Mae and Freddie Mac (GSE) loans. Gary Thomas, NAR president said the letter was intended "to raise concerns about continued attempts to increase the cost and reduce access to conventional mortgages for an ever increasing amount of borrowers." He specifically alluded to a September 8 article in the Wall Street Journal which stated that DeMarco would reduce the conforming loan limit, currently set at $417,000, notwithstanding the statutory prohibitions against such a change.
Thomas noted that DeMarco had not yet made public any legal theory for overriding the statutory prohibition but doubted that he had the authority. Congress sets the loan limits and adjusts them annually and after an effort by the FHFA predecessor agency OFHEO to unilaterally reduce limits in 2007 Congress made its policy against such reductions permanent in the Housing and Economic Recovery Act of 2008 (HERA).
Thomas's letter acknowledges the broad authority granted FHFA as conservator of the GSEs but said NAR believes it is required to exercise it within the statutory framework established by the GSE's Charter Acts. If allowed to exceed the authority in the area of loan limits, Thomas asks, what would prevent FHFA from making other fundamental changes, a litany of which he outlined. "Aside from our apparent disagreement over whether you have legal authority to reduce loan limits or make other fundamental changes to the mission of the Enterprises, we believe that a decision to override congressional intent made clear by the specific prohibitions in the Charter Acts, cited above, is bad policy," the letter says.
While private lending has been returning, it remains limited with tough credit standards attached, Thomas said. An arbitrary reduction in existing limits in the hope it will encourage more private sector lending is a social policy experiment that risks harming the recovery and denying homeownership to many credit-worthy borrowers who cannot meet the extremely risk averse standards prevailing in the jumbo market.
Lowering limits, Thomas said, will hit first-time homebuyers the hardest. He also expressed concern about the impact lower limits would have on high-cost markets such as many California cities, Washington, and Boston. "Without higher limits in these areas, many hard-working, middle income families will be denied homeownership simply because they happen to reside in an area of high home prices."
Lowering limits also would also create confusion and uncertainty for potential borrowers and lenders at a time when there is already turbulence in the market because of the new regulations regarding "ability to repay" requirements and the continued revisions to the definition of Qualified Residential Mortgage.
Thomas also questioned plans in FHFA's Strategic Plan for 2013-2017 to raise guarantee fees "closer to the level that other market participants would charge to assume the credit risk." This assumes, Thomas said, that if the GSEs continue to raise fees then pricing will be attractive enough to draw private money back into the mortgage market. However a July report from FHFA's Inspector General raised questions and concerns about this policy and recommended that FHFA "develop definitions and performance measures that would permit Congress, financial market participants, and the public to assess the progress and effectiveness of FHFA's initiative."
Thomas said the supposition that higher costs for GSE loans will help return the private sector to the mortgage market runs contrary to history: In the 1990s the GSEs had more than a 60% share of the market, FHA and other federal programs had approximately a 20% share, and the private sector had less than a 20% share.
There may be many other factors keeping purely private sector lending at current low levels Thomas said, pointing to some of the Dodd-Frank regulations and investors' fears over litigation. There are also concerns that higher fees could drive more borrowers to FHA rather than enticing private money back into the market.
Thomas also asked DeMarco to consider removing the adverse market fees put in place in 2008 because of deteriorating market conditions. Noting the many improvements in market indicators in recent months he said that NAR believes that there is no longer a factual basis for imposing an adverse market fee on all mortgages in all markets and it should be rescinded.
Finally Thomas raised the issue of the revisions to the agreement between Treasury and the GSEs which now requires the latter to pay all but a small amount of their incomes to Treasury. The policy, he said, may make the transition to a replacement structure for the GSEs much more difficult by removing capital that could be used for reserves to meet GSE obligations as they are wound down and to capitalize a backstop ahead of taxpayer support.
Thomas concluded saying NAR urges FHFA to "resist using general conservatorship powers to override the congressional policy that loan limits not be reduced. If you remain determined to amend FHFA policy and lower the loan limits, we believe you should proceed through notice and comment rulemaking to give all interested parties, including Members of Congress, an opportunity to fully explain their legal and policy objections.
We also urge FHFA to take the OIG recommendation to heart and establish definitions and measurement standards for its policy of increasing fees to entice the private sector back into the mortgage market."