Loan limits on Fannie Mae, Freddie Mac, FHA and VA loans should be gradually reduced to encourage the private sector to play a larger role in the housing finance system, according to a Bipartisan Housing Commission.

A gradual reduction in the maximum loan limits should “serve as the primary policy dial to assist in this transition” to where private capital has the dominant share of the mortgage market, according to a report the BHC released Monday morning.

The private commission, co-chaired by former Sens. Christopher Bond and George Mitchell and former HUD secretaries Henry Cisneros and Mel Martinez, noted that Congress and the executive branch will determine the loan limits.

But looking at historical loan limits before the housing crash, the commission notes that loan limits might be in the range of $150,000 to $175,000 for FHA, VA and Rural Housing loans.

The commission also encourages the GSE regulator to continue to ratchet up guarantee fees on Fannie and Freddie loans to reduce their market share.

The BHC report calls for the creation of a wholly owned government corporation that will provide guarantees for MBS that are currently guaranteed by Fannie and Freddie.

This new “Public Guarantor” would be similar to the Ginnie Mae model and it would assume the secondary market role of the GSEs.

“After Congress has adopted a new model, an extended period of time (five to ten years) will be needed to unwind the single-family operations of Fannie Mae and Freddie Mac in an orderly fashion and rebalance capital flows as the private sector steps in and the government footprint becomes smaller,” the BHC report says.

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