Senator Proposes Fannie, Freddie Fix to Subprime Problems

A powerful Senator introduced legislation Monday that would grant mortgage buyers Fannie Mae and Freddie Mac temporary access to previously untouchable loans to stem the tide of subprime mortgage defaults.

Sen. Charles Schumer (D-N.Y.), Chairman of the Congressional Joint Economic Committee and member of the Senate Committee on Banking, Housing, and Urban Affairs, said Monday that his bill would lift the portfolio cap on loans Fannie and Freddie can hold by 10 percent and would set aside some $72.5 billion for homeowners with adjustable-rate mortgages to use to refinance into fixed-rate loans that would be more attractive to mortgage buyers. The bill would also allow Fannie and Freddie to go after larger loans.

Fannie Mae and Freddie Mac buy and guarantee loans originated by private lenders. They were both created by Congressional mandate and are considered government sponsored enterprises (GSEs)

Currently, GSEs operate under certain restrictions – they cannot buy mortgages that have values of over $417,000, and portfolio caps put a ceiling on the value of their total loan portfolios. Schumer said in a release that raising the cap 10 percent would free up $145 billion to purchase new loans. The increase would help families in regions where homes are more expensive, said Schumer. The loan limit and portfolio cap increases would expire after one year.

The impact of the bill is unclear. Eva Weber, an analyst with the Aite Group, said that Schumer’s proposal "is not a long-term solution,” but that it "does stand to help some families that are in ARMs.” Schumer said in his release that the bill would help “tens of thousands of Americans.” 

Not everyone agreed that Schumer’s plan was the right course of action. Treasury Secretary Henry Paulson said yesterday that lifting the caps on Fannie and Freddie wouldn’t help those at risk of foreclosure because the GSEs target prime mortgages. “We don’t have a problem in the prime market,” he said, according to Congress-focused publication The Hill.

Instead, Paulson said Congress should be focusing on real reform at Fannie and Freddie. He agrees that GSEs should be be allowed to take on more risk, but only if reform is part of the deal.

In addition to Schumer’s bill, a proposal last week by Senate Banking Committee Chairman Christopher Dodd, D-Conn., would ban prepayment penalties and prohibit steering of customers to higher-priced loans.