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The Federal Housing Finance Agency (FHFA) is seeking public comments on its plan to reduce the maximum size of residential loans which Fannie Mae (FNMA) and Freddie Mac (FMCC) can purchase. The FHFA is expected to implement its plan from Oct 2014.

In November, the FHFA announced that there will be no change in the loan buying limit for Fannie Mae and Freddie Mac in 2014. At present, the general loan purchase limit is $625,500 in the country’s high-cost areas (Los Angeles, New York and Washington), while the loan purchase limit for the rest of the country is $417,000 for a single-unit property.

Now, the FHFA is contemplating lowering the loan purchase limit by approximately 4.1%. Hence, the loan limit in the country’s high-cost area will be lowered to $600,000, while for the rest of the nation it would likely be $400,000. The plan, if implemented, will not affect loans that were originated prior to Oct 1, 2014.

The primary reason behind lowering the loan purchase limit is reduce Fannie Mae and Freddie Mac footprints in the market, thereby limiting taxpayers’ exposure to possible losses. Further, this will allow other firms to re-enter the market and purchase high-end loans.

At present, Fannie Mae and Freddie Mac own or guarantee nearly 67% of all the U.S. residential loans. These loans are then packaged into securities and sold to investors. Hence, any change in the loan purchase limit will have a significant impact on the overall housing sector.

Nevertheless, National Association of Realtors, the National Association of Home Builders and the Mortgage Bankers Association are against this change. According to these bodies, lowering the loan purchase limit would jeopardize the housing market recovery. Also, there is uncertainty around the entrance of other firms to fill in the void.

Moreover, the FHFA is seeking inputs on whether a six months’ advance notice is adequate for implementation of plans and whether the FHFA should announce a multi-year schedule of decreases.

The FHFA’s plan to lower the loan purchase limit of Fannie Mae and Freddie Mac will restore investors’ confidence in the gradually recovering the housing market. Further, other firms will be to benefit from buying and re-selling the loans.

Currently, Fannie Mae and Freddie Mac carry a Zacks Rank #2 (Buy). Some better-ranked finance stocks include Kohlberg Kravis Roberts & Co. L.P. (KKR - Snapshot Report) and Waddell & Reed Financial, Inc. (WDR - Analyst Report). Both the stocks have a Zacks Rank #1 (Strong Buy).

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