WASHINGTON -- The Bush administration said yesterday that it would support allowing two government-sponsored mortgage giants to buy and sell "jumbo" mortgages, a move that could boost housing markets in expensive locales.
"There is little question that allowing [Fannie and Freddie] to securitize jumbo mortgages would give a short-term lift," Paulson said at a hearing where lawmakers sought suggestions for remedying the mortgage industry's ills.
Federal Reserve Chairman Ben S. Bernanke appeared cool to the idea, saying if Congress expands Fannie Mae's and Freddie Mac's expansion into the jumbo market the move should come very quickly and be only temporary.
Fannie Mae and Freddie Mac were created by Congress to help mortgage markets work more smoothly.
One role of the companies, which are both publicly owned, is to increase the supply of money available for mortgages by purchasing loans from the original lenders.
But under current rules, Fannie Mae and Freddie Mac can buy only mortgages worth less than $417,000. Bigger "jumbo" mortgages generally are bought and packaged into financial securities by Wall Street firms.
In Maryland, about 11 percent of loan applications are for jumbo mortgages, according to the Mortgage Bankers Association. Only seven states and the District of Columbia have higher percentages.
In recent months, private investors have been spooked by a wave of defaults in the subprime mortgage market, and the inability of Freddie Mac and Fannie Mae to buy jumbo loans has sent interest rates for those mortgages steeply higher.
Traditionally, the jumbo mortgage market has been profitable, with low default rates. "For that reason, it seems logical that this market will right itself in the weeks and months ahead," Paulson said.
But Paulson said expanded authority for Fannie Mae and Freddie Mac should be time-limited and tied to broader legislation to "strengthen the regulatory structure" of the two mortgage-financing enterprises.
Rep. Barney Frank, chairman of the House committee, agreed that "we should be raising the cap" on Fannie and Freddie.
"I think there's a general agreement that investors, having once been too reckless, are now, to some extent, too cautious, and this isn't going to go away instantly," said the Massachusetts Democrat.
But Frank also said Congress should boost oversight of the mortgage business. "Sensible regulation can work well," he said.
James B. Lockhart, the director of the Office of Federal Housing Enterprise Oversight, which regulates Fannie Mae and Freddie Mac, said he would agree "with Secretary Paulson that a modification of the conforming loan limit should only be considered as part of comprehensive reform."
Bernanke told the House committee the nation's credit crunch has created "significant market stress." On Tuesday, the Fed cut its key interest rate from 5.25 percent to 4.75 percent as part of an effort to make lending easier.
Bernanke also vowed that the Fed would crack down on abusive or bad lending practices. "We are responding to the subprime problems on a number of fronts," he said. "We are committed to preventing problems from recurring, while still preserving responsible subprime lending."
The housing sector is in its worst slump in 16 years, with foreclosures running at record levels.
At a White House news conference, President Bush said he is looking forward to working with Congress on solving problems in the housing market, but added he is "optimistic about our economy."