FOR IMMEDIATE RELEASE: September 10, 2007
Schumer To Introduce Legislation Today To Lift Portfolio Caps And Loan Limits For Fannie Mae And Freddie Mac
Bill Would Devote 50 Percent of Increased Cap Space To Refinancings of Subprime Loans—Also Bring Liquidity to Jumbo Market in High-Cost Areas
Senator: It's Time to Let Fannie, Freddie Do The Job They Were Designed To Do
Washington, D.C. – Bucking the Bush administration’s refusal to bring badly needed liquidity to the mortgage markets, Senator Charles E. Schumer (D-NY) introduced legislation today that would significantly enhance the ability of Fannie Mae and Freddie Mac to both provide capacity for lenders to refinance borrowers trapped in subprime loans and bring relief to the increasingly troubled “jumbo” market sector.
The “Protecting Access to Safe Mortgages” Act would temporarily lift the limits on the GSEs’ mortgage portfolios by 10 percent, which would free up approximately $145 billion for the purchase of new mortgages. Schumer’s bill would require half of this total to go specifically towards refinanced mortgages for borrowers whose existing adjustable rate loans were scheduled for an interest-rate reset between June 2005 and December 2009. This provision will ensure that the cap loosening delivers a clear benefit to the subprime segment that first inflamed the mortgage crisis. Up to 80 percent of subprime loans originated in 2006—the year that lax underwriting seems to have been the most problematic—were adjustable rate mortgages with low “teaser rates” that reset to higher rates that induce payment shock on the borrowers.
“This common-sense measure will deliver a shot in the arm that could make refinancings possible for tens of thousands of Americans trapped in the subprime mess,” Schumer said. “Together with nonprofits, lenders and loan servicers, Fannie and Freddie are the missing ingredient to stem the rising tide of foreclosures that is about to hit the economy. The bottom line is that we should be deploying Fannie and Freddie to do the job they were designed to do.”
Schumer’s legislation also lifts the conforming loan limit for the GSEs by up to 50 percent in “high-cost areas.” This will make higher-cost loans available for purchase by Fannie and Freddie, bringing liquidity to metropolitan areas where the median home price for a single-family home is above the GSEs’ current conforming limit of $417,000. The increases on both the portfolio caps and the loan limits would sunset one year following the bill’s enactment.
Schumer’s bill is necessary on account of the Bush administration’s refusal to tap the GSEs to play the role they were designed for. In August, Senator Schumer wrote a letter to James B. Lockhart III, the director of the Office of Federal Housing Enterprise Oversight (OFHEO), urging him to consider temporarily raising the limit on purchases of home loans by Fannie Mae and Freddie Mac in response to increasing concerns of a credit crunch spilling into the broader mortgage market. OFHEO rejected Schumer’s request, even as it has since become increasingly clear that the deterioration in the mortgage markets has gone from bad to worse. Liquidity is virtually nonexistent for loans that do not conform to Fannie and Freddie’s portfolio standards, which is hurting current and aspiring homebuyers’ ability to access lending.
This emergency measure is not only important to restore confidence in the mortgage market for current and aspiring home buyers, but it would also provide crucial and necessary financing by Fannie and Freddie to subprime foreclosure relief efforts across the country before the “October surprise” of subprime resets further shocks the mortgage markets. One trillion dollars worth of adjustable rate mortgages (ARMs) are due to reset between now and November of next year. Fannie Mae has estimated that 1.5 million subprime homeowners who face resetting ARMs and potential payment shocks this year and next would qualify for a safe, fixed-rate loan backed by the GSEs.
Senator Schumer has been at the forefront of Congressional efforts to contain the subprime market crisis and ensure that irresponsible underwriting of this magnitude is not allowed to happen again. In May, Schumer introduced the first major legislation to deal with unscrupulous lending practices this Congress, the Borrowers Protection Act, which would upgrade standards that mortgage brokers must abide by when making new loans to borrowers.
Schumer has also helped to secure $100 million in foreclosure prevention funding that was approved by the Senate Appropriations Committee for HUD Housing Counseling programs in the Transportation, Housing and Urban Development, and Related Agencies spending bill. The Senate may approve the bill as early as this week. With these funds, non-profit agencies will be able to provide individual counseling by working one-on-one with borrowers who are in unsuitable subprime loans.