Lowering the Limits for Mortgages Insured by Fannie Mae and Freddie Mac

In the past week, the news about Fannie Mae and Freddie Mac focused on the $13 million in bonuses paid to the top executives. But a much more significant story has received much less publicity: the bipartisan resistance to the lowering of the mortgage limits for Fannie and Freddie.

Both parties agree that the role of Fannie Mae and Freddie Mac should be reduced. In their 2010 “Pledge to America,” the GOP promised to reform these two agencies by “ending their government takeover, shrinking their portfolios, and establishing minimum capital standards.” President Obama has also proposed a gradual winding down of Fannie and Freddie.

October 1 could have been the first step in this gradual winding down. During the crisis, Congress temporarily allowed Fannie and Freddie’s to insure mortgages of higher value—up to $729,750 in some markets. These higher limits expired September 30, meaning that as of October 1, the private sector is responsible for more of the mortgage market. The maximum mortgage size is now $625,500 in high-cost markets.

This is a responsible action to take. These lower limits affect only a small slice of wealthy individuals residing in wealthy communities—only 1.3% of all insured loans fit into this category. And even if you accept that the government has a role in promoting homeownership, it is fairly safe to say that most of these homebuyers are wealthy enough that they could own a home (albeit, maybe a slightly smaller home) without government support. In sum, lowering the mortgage limit is a relatively painless way of drawing down Fannie Mae and Freddie Mac.

Unfortunately, the fear of causing even the tiniest amount of pain to this affluent sector of the home mortgage market has triggered a bipartisan effort to extend the temporary increase for another two years. The Senate passed an amendment—sponsored by one Democrat and one Republican—to a spending bill, and there is even a smattering of support in the House GOP to extending the increase. From the National Review:

There is some support for the measure in the House GOP conference, mostly consisting of lawmakers representing wealthier coastal states with the higher home prices most likely to be affected by an extension (or lack thereof) of the limit increase. Reps. John Campbell (R., Calif.) and Gary Miller (R., Calif.), for example, have urged Republican leaders to support the extension, arguing that the housing market remains too vulnerable to limit federal support at this time. Campbell said in a recent interview with Roll Call that if the new limit is not extended, home prices will “crater, and it’ll be our fault.”

Decreasing loan limits to $625,500 is significant step in the right direction. It would pare back the role of Fannie Mae and Freddie Mac without meaningfully affecting homeownership. Hopefully lawmakers can overcome the short-term pressure to keep these higher limits in place, and instead develop more targeted policies to support home ownership.

Bob Pozen is a Senior Lecturer at Harvard Business School and a Senior Fellow at the Brookings Institution. His latest book, Extreme Productivity, is now available at your favorite local or online bookstore.

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