by Amy Lillard
Three months after the government-sponsored entities received increased lending power from congressional action, a move designed to revive housing starts and stimulate the economy, the companies are bypassing the loans that need the most help in order to reduce their own financial losses.
Jumbo loans, those above $417,000, made up nearly one-third of the US market last year, according to the Mortgage Bankers Association. In February, the fiscal-stimulus bill temporarily allowed Fannie Mae and Freddie Mac to buy jumbo loans in 91 of the most expensive U.S. housing markets. The new congressional rules allowed the companies to enter the jumbo market to inject cash into a struggling sector, and the failure of the companies to do so may have exacerbated the housing slump, according to some analysts.
While the National Association of Realtors estimated last year that Fannie Mae and Freddie Mac would buy $150 billion of jumbo loans in 2008, new projections indicate the amount will be less than $74 billion.
The companies are instead focusing on buying their own mortgage-backed securities, an effort to reboot from record losses of $11.8 billion in the past three quarters. Accounting errors were revealed showing the root of the problem; mortgage defaults, reaching the highest levels in 30 years, were also responsible in part for Fannie Mae and Freddie Mac's financial woes.
Some impact from Fannie Mae and Freddie Mac's entry into the jumbo loan market has been felt. Jumbo rates have fallen by about half a percentage point, and loan prices are often on the same terms as smaller mortgages. In effect, this makes obtaining these loans more affordable and accessible for borrowers.
But the focus on their own products, and on a higher echelon of borrower means many are not being helped. The two companies require a minimum down payment of 10 percent and a credit score of 660 for jumbo loans, meaning many buyers and refinancing homeowners do not qualify.
Congress created Fannie Mae and Freddie Mac to promote home ownership by increasing financing and providing market stability. The companies own or guarantee nearly half of the $12 trillion in U.S. residential mortgage debt. Company profit comes from fees charged on bond guarantees, and by holding assets that yield more than debt.
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