There has been confusing commentary on Fannie Mae’s and Freddie Mac’s role in the secondary mortgage market and how they might contribute to easing the current disruptions. As the regulator of these companies, one role of the Office of Federal Housing Enterprise Oversight (OFHEO) is to enhance public understanding of the secondary mortgage market. To that end, this Note explains the conforming loan limit and the portfolio caps currently in place for Fannie Mae and Freddie Mac.
Specifically, the conforming loan limit refers to the maximum principal balance of individual mortgages that Fannie Mae and Freddie Mac may purchase. Set forth in their charters by the Congress, the loan limit is based on year-over-year changes in a house price series published by the Federal Housing Finance Board based on its Mortgage Interest Rate Survey. OFHEO then calculates the maximum amount the conforming loan limit may be based on the increase or decrease calculated by the Finance Board. After OFHEO announces the new maximum amount, Fannie Mae and Freddie Mac then announce whether they will set the conforming loan limit at or below the new maximum. OFHEO does not have the authority to increase the conforming loan limit above that resulting from the calculation.
Portfolio caps refer to limits on the total dollar amount of mortgage assets Fannie Mae and Freddie Mac may hold on their balance sheets. Portfolio caps were put in place in separate agreements between OFHEO and each Enterprise due to safety and soundness concerns. The agreements were established to limit the size of the portfolios (but not to limit Enterprise securitization of mortgages) as the Enterprises remediate existing accounting and internal control issues. The portfolios are not static. Each month, borrowers make principal payments that reduce their loan balances and some borrowers prepay their mortgages. At the same time, each month the Enterprises are adding new mortgages to their portfolios, within the cap limits.
The following discussion elaborates on these two important topics. Definitions of mortgage terms and an index to relevant documents appear at the end.