Home prices have surged — and so will the government’s share of mortgages
By Andrea Riquier
Published: Nov 27, 2018 1:47 p.m. ET
Expanded Fannie and Freddie mortgage qualification again raises question over best use of federal resources for housing
A federal regulator has raised the dollar amount of home loans that qualify for backing by Fannie MaeFNMA, -0.86% and Freddie Mac FMCC, -0.88% , the two giant government-sponsored enterprises.
In 2019, the maximum conforming loan limit will be $484,350, the Federal Housing Finance Agency said Tuesday. That’s up 6.9% from the 2018 maximum of $453,100. The change is based on the rate of change in home prices between the third and fourth quarters, as measured by FHFA’s House Price Index.
But in higher-priced areas, loan limits are capped at 150% of the baseline $484,350. That means Fannie and Freddie will guarantee loans up to $726,525 in roughly 100 higher-cost counties.
Raising the dollar limit on Fannie- and Freddie-backed loans is one way of lubricating the mortgage market. If banks or other lenders can sell bigger mortgages to the enterprises, that makes it easier for them to keep lending. In turn, that makes it easier for would-be buyers to find financing that is generally more advantageous than other types of mortgages, like those backed by the Federal Housing Administration.
But it also increases the risk to taxpayers. Fannie and Freddie operate with only a slim capital reserve, as the result of a 2012 directive from Congress that was patched over late in 2017. The update was owed to an agreement between FHFA Director Mel Watt and the U.S. Treasury even as they continue to guarantee between 40%-50% of new mortgages. That means that in any given quarter, either company is at risk of having to take taxpayer money.
Many Washington housing analysts were carefully watching FHFA’s move on the loan limits this year. Watt’s term is up this year, and he will likely be replaced by someone well known to Treasury Secretary Steven Mnuchin. Many Washington insiders think it will be Joseph Otting, who currently serves as comptroller of the currency. Otting worked for Mnuchin at OneWest Bank, and it’s widely believed that Mnuchin intends to attempt a permanent Fannie-Freddie fix once he has a trusted deputy helming FHFA.
Related: To free Fannie and Freddie, their regulator may bypass do-nothing Congress
In any such overhaul, Republicans are expected to press for the government to have a smaller footprint in the mortgage market, a step that could be achieved by narrowing the types of loans offered or the ability of borrowers to access the market, analysts have said. In turn, Democrats would likely okay lower loan limits, on the premise that anyone with the means to buy a home worth nearly a million dollars may not need as much government assistance.
The loan limits “are the right policy lever to debate,” said Ed Golding, currently a fellow at the Urban Institute, who previously served as head of FHA. Golding thinks scaling back the limits is “the cleanest way to reduce the government’s footprint” if that’s what policymakers want.
While Golding acknowledges that the optics of the higher loan limits are uncomfortable, he points out that the government’s fingerprints are all over the financial system, including in backing the banks that make — and keep on their books — jumbo mortgages.
“Loan limits are something that should not be one-offs, but part of the overall discussion of housing finance reform,” Golding told MarketWatch.
