Frank aims to 'unstick' jumbo home mortgages

Congressman will hold hearing on delay in implementing rule

US Representative Barney Frank spoke at the Mortgage Bankers Association meeting in Boston yesterday. (LISA POOLE/ASSOCIATED PRESS)

A key House lawmaker yesterday complained that the mortgage industry has done little over the past month to make higher-value loans available in costly housing markets since Congress took steps to try to infuse more cash into the so-called jumbo market.

Representative Barney Frank, a Massachusetts Democrat, said the House Financial Services Committee, which he chairs, will hold a May 21 hearing to find out why jumbo mortgages remain difficult to get and continue to carry high interest rates, despite new rules that took effect April 1. Frank will try to get answers from mortgage bankers, Wall Street financiers, and government-sponsored mortgage firms Fannie Mae and Freddie Mac.

"I am disappointed," Frank said in response to an audience question after a speech to a Mortgage Bankers Association conference. "We fought very hard to raise the loan limits for Fannie and Freddie, and there have been a lot of problems in implementation."

Frank said he called the hearing to "try to unstick" loans made under the new rules covering jumbo mortgages.

"There is a chain of people blaming each other, and we're going to call everybody in there into the hearing and find out why," Frank said.

To address the worst housing crisis in decades, the $168 billion economic stimulus package that President Bush signed in February included a temporary increase in the cap on mortgages that Fannie and Freddie can purchase or guarantee. In Massachusetts, the ceiling on jumbo mortgages was increased to $523,750 from $417,000. The change will be in effect through 2008.

The goal was to spark investor demand for securities made up of higher-value mortgages backed by Fannie and Freddie, which would have the effect of driving down interest rates on jumbo loans and spur home buying and refinancing activity.

But lenders and loan brokers said the rates for jumbo mortgages above $417,000 had not dropped enough to spark demand, or help out buyers or those who want to refinance existing mortgages. In some cases, the rates on loans between $417,000 and $523,750 were nearly one percentage point higher than those for conventional loans. Moreover, the federal loan guarantors have placed steep fees and qualifications on the new loans that further limit their availability.

The immediate impact was expected to be muted, as investors in mortgage-related securities remain wary of making risky investments, even if they're tied to mortgages guaranteed by Fannie and Freddie.

Although Freddie Mac said two weeks ago that it would use its new lending flexibility to buy up to $15 billion in home loans for higher-priced properties, Frank said he was surprised by how out of reach jumbo loans remain.

Policy makers want to ease that gap so borrowers with decent credit ratings can buy a home or refinance more easily in such pricey markets as Boston, New York, and San Francisco, where modest homes often can approach or exceed $1 million, making jumbo mortgages a necessity.

Jay Brinkman, chief economist for the Mortgage Bankers Association, said Wall Street investors have been cautious about investing in jumbo mortgages under the new higher cap until the market determines how to properly price such securities and assess their risks.

"You don't want to guess on the low side," Brinkman said. "If you make a mistake in this environment . . . you can take a serious price hit."

Also yesterday, Frank said his mortgage-relief bill will cost taxpayers $5,000 for every averted foreclosure.

"That's about as good a deal as America is going to get in this current situation," he said.

Frank's legislation would create a program at the Federal Housing Administration to insure as much as $300 billion in refinanced mortgages. Lenders would agree to reduce principals, making the loans more affordable for struggling borrowers.

The House of Representatives will probably pass the legislation tomorrow, along with other housing-related measures, including a strengthening of oversight for Fannie Mae and Freddie Mac, Frank said.

The congressman cited a May 2 report by the Congressional Budget Office estimating that the FHA program would cost $2.7 billion between 2008 and 2013 and help 500,000 people keep their homes. He cautioned mortgage lenders at the conference to take part in the voluntary program, or face stricter government regulation.

"If this approach fails, I must tell you that much tougher, more intrusive regulation looms," Frank said. "This, I think, is our last chance to make things work without some very drastic changes in the system."

Kim Blanton of the Globe staff contributed to this report.