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This article on Bloomberg talks about Paulson and Bernanke wanting to increase the Fannie and Freddie market from $417,000 to $1,000,000. I’ve got a couple of reactions to that:
1. If Fannie and Freddie are currently bleeding money and we don’t really know how bad things are in their current portfolios and they don’t have enough capital (or it appears that they don’t) to handle the current loan pipeline and what do we want to do? Give them a larger portion of the mortgage market? Are we asking for trouble?
2. I’d love to see Fannie and Freddie start buying jumbos because I think it would unfreeze the jumbo market a bit.
So, what do you think?
The first problem is the implicit guarantee that Fannie and Freddie have. Do you really think that the US government will let them fail if something goes awry? I don’t think they would let them fail without a fight. This would be a taxpayer-money bailout. Prices have a long way to fall - why would we want to expose the GSEs (and by extension the taxpayer) to loans that have a better than 50% chance of going negative equity in the next few years?
Second, it means that the conforming limit is no longer about REACTING to economic factors but is now an attempt to DRIVE economic factors.
It is well known that the average Californian does not have an income that is substantially higher than other states where home prices are more reasonable. Californians are buying at higher price to income multiples. Driving the conforming limit higher is an attempt to sustain prices, not an attempt to increase affordability.
For the sake of the greater good, prices need to find their own level. Certain markets should not be singled out for special treatment.
The best way to set the limit would be to index it to median incomes instead
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