By Margaret Chadbourn
WASHINGTON, Sept 9 (Reuters) - The regulator of Fannie Mae and Freddie Mac is preparing to lower the size of home loans the two government-run firms can back in an effort to dial down Washington's heavy presence in the mortgage market.
The Federal Housing Finance Agency (FHFA) wants to reduce the so-called conforming loan limits by the start of next year. The limits, which vary by metro area and are based on local median house prices, set a cap on the size of loans Fannie Mae and Freddie Mac Mac can buy or guarantee.
The FHFA's aim is to shrink the footprint of Fannie Mae and Freddie Mac in the marketplace and expand the role of private capital in mortgage finance, said Denise Dunckel, a spokeswoman for the the agency.
"A gradual reduction in loan limits is an appropriate and effective approach to reducing taxpayer's mortgage risk exposure," said Dunckel, adding that any such change would be announced for implementation on January 1, 2014.
In most markets, Fannie Mae and Freddie Mac cannot back loans of more than $417,000, although the cap ranges as high as $625,500 in pricier areas -- including Washington, D.C., California and the New York City metropolitan area -- and up to $721,050 in Hawaii.
Lowering these caps, which were raised in 2008 to help ensure mortgage liquidity during the financial crisis, could make larger loans more difficult to obtain and more costly if the private market does not step in to fill the void.
Analysts, however, see some signs the so-called jumbo loan market is loosening up. Banks are vying to orginate big loans to those with the most pristine credit by offering rates that are sometimes below those offered by Fannie Mae and Freddie Mac.
The average interest rate for a 30-year-fixed rate conforming mortgage is 4.73 percent. That compares with 4.71 percent for a jumbo loan, according to the Mortgage Bankers Association. Historically, jumbo rates have been at least 0.25 to 0.50 points percentage points higher than conforming loan rates.
The low jumbo loan rates reflect a pick up in investor demand for securities backed by larger mortgages.
"You're getting jumbo rates that are better right now than Fannie and Freddie conforming loans. So it poses the question - why would an originator sell to Freddie or Fannie if the non-agency market starts to price better?" said Kevin Barker, an analyst with broker-dealer Compass Point Research & Trading.
"If the bank is going to make that loan, they have increased confidence the loan could be sold if their loan book becomes too concentrated in residential mortgages," said Barker.