BILL ANALYSIS Ó
SENATE BANKING & FINANCIAL INSTITUTIONS COMMITTEE
Senator Noreen Evans, Chair
2013-2014 Regular Session
SJR 19 (Correa) Hearing Date: April 9,
2014
As Introduced: March 10, 2014
Fiscal: No
Urgency: No
SUMMARY Would express the Legislature's opposition to a
reduction in the high-cost conforming loan limits used by Fannie
Mae and Freddie Mac.
DESCRIPTION
1. Would make a series of findings related to the history of
the high-cost loan limits used by the government-sponsored
enterprises (GSEs; colloquially known as Fannie Mae and
Freddie Mac), the conservatorship of Fannie Mae and Freddie
Mac in 2008 by the Federal Housing Finance Agency (FHFA), a
December 2013 proposal by FHFA to reduce the national and
high-cost loan conforming limits used by Fannie Mae and
Freddie Mac, and the adverse consequences that could result
to California's housing market if the FHFA's proposal is
allowed to move forward.
2. Would express the Legislature's opposition to any reduction
in the current national and high-cost conforming loan limits
for Fannie Mae and Freddie Mac and urge the FHFA not to
implement any reductions to these limits.
3. Would further urge the President of the United States and
the United States Congress to join California in opposing
any reduction in the national and high-cost conforming loan
limits.
EXISTING FEDERAL LAW
4. Establishes the FHFA, and places responsibility with FHFA
for overseeing the Federal National Mortgage Association
(Fannie Mae) and the Federal Home Loan Mortgage Corporation
(Freddie Mac).
SJR 19 (Correa), Page 2
COMMENTS
1. Purpose: This resolution is intended to express the
California Legislature's opposition to a reduction in the
GSE's loan limits.
2. Background: Fannie Mae and Freddie Mac, collectively known
as the GSEs, purchase and guarantee residential mortgage
loans, providing the funding necessary to sustain the United
States housing market. According to the most recent
available data, 77% of all United States mortgages are owned
or guaranteed by the GSEs. From January 1, 2009 through
December 31, 2013, Fannie Mae (the larger of the two
enterprises) provided approximately $4.1 trillion in
liquidity, which enabled 3.7 million home purchases and 12.3
million mortgage refinancings. During the same time period,
Freddie Mac provided approximately $2.2 trillion in
liquidity, which enabled 2.0 million home purchases and 7.7
million refinancings.
Fannie Mae and Freddie Mac have a limit (the "conforming loan
limit") on the maximum size of loans they are allowed to
purchase and/or guarantee. Generally speaking, borrowers who
obtain conforming loans pay a lower interest rate than those
who obtain "jumbo" loans (i.e., loans whose principal amount
upon origination exceeds the conforming loan limit).
For several decades, the GSEs had a single conforming loan limit
for the contiguous 48 states. The national conforming loan
limit for mortgages that finance single-family one-unit
properties was $33,000 in the early 1970s. Periodic
inflation adjustments increased this limit to $417,000 by
2006, a level at which it remained until 2008. These limits
were 50% higher in four statutorily-designated high cost
areas, including Alaska, Hawaii, Guam, and the U.S. Virgin
Islands.
Federal legislation enacted in 2008 established two sets of
conforming loan limits: general limits and high-cost
limits. High-cost limits were intended to reflect the
reality that housing costs vary across the United States and
the concern that buyers in high-cost areas were
disadvantaged by a conforming loan limit system that failed
to reflect the significant variance in home prices across
the country. Because jumbo loans traditionally carry higher
interest rates than conforming loans, home buyers in
SJR 19 (Correa), Page 3
high-cost areas were being doubly penalized by their choices
of residence - once by the high cost of the homes in their
areas and a second time by the higher interest rates they
were required to pay on the jumbo loans they required to
purchase those homes.
The general conforming loan limit has remained at $417,000 since
2006. Federal legislation, including the Housing and
Economic Recovery Act of 2008 and the American Recovery and
Reinvestment Act of 2009, temporarily established high-cost
loan limits at levels as high as $729,750. Those limits
have since fallen to $625,500 pursuant to the provisions of
that federal legislation. Individuals wishing to know
whether their area is one in which the general conforming
loan limit or the high-cost loan limit applies can look up
this information on the Federal Housing Finance Agency web
site (http://www.fhfa.gov/Default.aspx?Page=185).
This resolution addresses the question of whether those limits
should be reduced further, or retained at their current
levels.
3. Conservation of Fannie Mae and Freddie Mac: In early
September 2008, at the height of United States' mortgage
market turmoil and shortly before the failure of Lehman
Brothers and several other large financial institutions,
both Fannie Mae and Freddie Mac were placed into
conservatorship. Their conservation by FHFA was intended to
shore up their finances and prevent a complete collapse of
the United States housing market. By late 2008, most
sources of private mortgage financing had fled the United
States mortgage market in panic about high foreclosure
rates. The GSEs' conservation guaranteed their continued
existence and was one of many attempts taken by the federal
government to calm the mortgage markets and help avoid an
economic depression. In total, the federal government
provided the GSEs with over $180 billion in taxpayer support
following their conservation.
As foreclosures have declined and the national housing market
has recovered, considerable discussion has focused on the
future of the GSEs. Myriad plans have been advanced by
different entities within the federal government, and a
significant number of bills have been introduced in
Congress, all with the aim of ending the conservatorship and
replacing it with a more stable, long-term mortgage market
SJR 19 (Correa), Page 4
framework. Most people believe that the federal government
must reduce its level of support for the United States
mortgage market, before private mortgage financing will
return. However, to date, there has been no agreement on
whether the GSEs should be retained, modified, or
eliminated, how best to reduce their role in U.S. mortgage
financing, nor even on the time frame in which those changes
should occur
Prior to the financial crisis, private mortgage financing
dwarfed public mortgage financing. As recently as 2006,
Fannie and Freddie supplied 43% of the capital within the
secondary mortgage market. Today, the federal government
backs nine out of every ten mortgages, when the mortgage
portfolio of the GSEs and the Federal Housing Administration
are combined. Many believe that level is unsustainable in
the long-term.
4. The Obama Administration's Choice of GSE Resolution Plans:
In February 2012, then-acting Director of the FHFA Edward
DeMarco submitted a strategic plan to Congress setting forth
objectives and steps that FHFA had taken or planned to take
to meet FHFA's obligations as conservator. In that
strategic plan, FHFA identified three strategic goals,
including: 1) building a new infrastructure for the
secondary mortgage market, 2) gradually contracting the
GSE's dominant presence in the marketplace while simplifying
and shrinking their operations, and 3) maintaining
foreclosure prevention activities and credit availability
for new and refinanced mortgages.
In December 2013, FHFA proposed to begin reducing GSE loan
limits, in an effort to begin the slow process of shrinking
the sizes of Fannie's and Freddie's portfolios, in
anticipation of their eventual elimination. According to
the press release that accompanied FHFA's request for
comments on its proposal, FHFA stated, "Setting reduced
'loan purchase limits' furthers the goal of contracting the
market presence of Fannie Mae and Freddie Mac gradually over
time, one of the key objectives of FHFA's 'Strategic Plan
for Enterprise Conservatorships.'
"Reducing the limits is also in line with President Obama's
August 2013 request that FHFA reduce loan limits in order to
reduce the government's footprint in the mortgage market.
The loan purchase limits, which FHFA would set under its
SJR 19 (Correa), Page 5
authority as conservator of Fannie Mae and Freddie Mac,
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.
"In areas where the statutory maximum loan limit for one-unit
properties is currently $417,000, the plan being
contemplated would set the loan purchase limit at
$400,000-approximately a four percent reduction. The loan
purchase limit would be reduced by the same percentage in
other parts of the country, including those areas where
current limits are at $625,500. Those loan purchase limits
would be set at $600,000."
FHFA is asking the public to take the long-term view that a
gradual reduction in GSE loan limits will have a positive
long-term impact on the housing market and the U.S. economy
by encouraging a return of private capital and restoring
more balance to the securitization market. The sponsor of
this resolution is asking the Legislature to oppose these
loan limit reductions, based on their short-term impact on
California's housing market.
5. Summary of Arguments in Support:
a. The California Association of Realtors (CAR) is
sponsoring this bill. CAR believes that "any reductions
to federal mortgage loan limit caps will limit California
homebuyers from access to safe and affordable mortgages
through Fannie Mae and Freddie Mac. Such a limitation,
in turn, is certain to ripple through the entire housing
market and have a negative impact on the larger economy."
CAR observes that California has 15 metropolitan
statistical areas (MSAs) that benefit from high-cost loan
limits, including 5 MSAs (encompassing 11 counties) which
benefit from the highest tier of high-cost loan limits.
Those eleven counties include Alameda, Contra Costa, Los
Angeles, Marin, Orange, San Benito, San Francisco, San
Mateo, Santa Barbara, Santa Clara, and Santa Cruz.
b. The California Independent Bankers (CIB) writes,
"Fannie Mae and Freddie Mac high-cost loans are important
to California's real estate industry. As local lenders,
SJR 19 (Correa), Page 6
community banks play a significant role in the housing
market. If the cap on Fannie Mae and Freddie Mac
high-cost loans is reduced under FHFA's proposal, tens of
thousands of loans in California could be negatively
impacted, including the mortgage loans of community bank
customers."
c. The California Credit Union League believes that
reducing the loan limits could potentially cut off access
to credit for California consumers or drive them to
higher priced lenders.
d. The California Mortgage Bankers Association is
concerned about the impact of a reduction in the
conforming loan limits. The housing markets remain
fragile, and proposed changes risk further constructing
access to credit and reversing progress made in the
housing recovery. Many potential homeowners remain on
the sidelines, unable to purchase a home or refinance
their mortgages due to rising rates, tight housing
inventory, and restrictive credit standards. In key
housing markets, the proposed loan limit reductions could
exacerbate existing problems.
6. Summary of Arguments in Opposition: None received.
LIST OF REGISTERED SUPPORT/OPPOSITION
Support
California Association of Realtors (sponsor)
California Credit Union League
California Independent Bankers
California Mortgage Bankers Association
Opposition
None received
Consultant: Eileen Newhall (916) 651-4102