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September 23rd, 2010

Here’s Washington’s chance to step aside

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Last month, both Treasury Secretary Timothy Geithner and HUD Secretary Shaun Donovan said that the government needs to begin to play a smaller role in the housing and mortgage markets. Well, here’s their chance…

The federal loan limits on Fannie Mae, Freddie Mac and FHA-backed loans — currently $729,750 — are set to expire at the end of this year. Nick Timiraos of the Wall Street Journal writes that, when they expire, the limits will fall to around $625,500.

To some, this seems like the perfect opportunity for Washington to begin to scale back their deep involvement in the markets. However, critics of the lower federal loan limits say that doing so will immediately cause an already-fragile housing market to suffer some more:

The fewer bank-issued mortgages that the three agencies [Fannie, Freddie, FHA] guarantee, the harder it is for borrowers to qualify for loans and the higher their interest rates. Unless lawmakers intervene, those higher limits, which mostly affect high-cost areas such as San Francisco, New York and Washington, D.C., will fall at year end to around $625,500.

If that happens, home prices would “drop precipitously” because it would be “impossible to finance homes in most parts of Los Angeles and certain other major cities” with high prices, Rep. Brad Sherman, a member of the House Financial Services Committee, said at a hearing last week. The California Democrat has introduced a bill to make the larger limits permanent and has attracted 74 co-sponsors.

While lawmakers in the high-cost areas are understandably concerned about lending availability, some economists contend that lawmakers may be making an issue where there isn’t one:

Some economists say such fears are overblown and that the government can begin to unwind its outsized share of the mortgage market. While housing is still soft, they say the drastic measures taken two years ago are no longer as necessary because home prices have fallen, mortgage rates are low and private lenders are in better shape.

“We need to think how we are going to exit from a Fannie-and-Freddie world, and this is a very small step toward that exit,” said Richard K. Green, director of the University of Southern California’s Lusk Center for Real Estate. “Dialing it back to $625,500 is a perfectly reasonable thing to do.”

According to the Journal, the Obama Administration currently supports a one-year extension of the higher loan limits. Due to the extremely stringent lending requirements in the market today, government-backed loans still may be the only option for some would-be borrowers in the nation’s high-cost areas.

As Guy Cecala, publisher of Inside Mortgage Finance, points out, you have got to give the private lenders some window to re-enter the market.

Given the fact that the private market has already shown several signs of interest in jumbo loans, and given the fact that the size of the jumbo marketplace that the three agencies guarantee is relatively small, only about 2-3 percent of the entire mortgage market would be adversely affected by the lower limits. That being the case, why wouldn’t the private market be able to absorb the loans that the three agencies could no longer guarantee?

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About the HSH Blog

HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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