Mending the broken U.S. housing finance system won’t be painless.
Costs on some mortgages will rise this fall as part of the Obama administration’s proposal to reform housing finance, including the bailed-out mortgage investors Fannie Mae (FNMA) and Freddie Mac (FMCC). That could add to the pressure on house prices, which are already headed lower after last year’s brief tax incentive-aided bounce.
The administration wants to shrink the size of loans eligible for Fannie Mae-Freddie Mac purchase. It will ask Congress to let a law that temporarily boosted the so-called conforming loan limit expire as scheduled Sept. 30.
As a result, Fannie and Freddie won’t be able to buy loans bigger than $625,000 in high-cost areas. That’s down from the current limit of $729,000.
The lower limit means many house buyers in places like New York, Boston, Washington and the big cities in California won’t be able to qualify for Fannie Mae-eligible mortgages, which carry the lowest rates. That could push them into the market for so-called jumbo loans, which typically carry rates about three-quarters of a percentage point above Fannie loans.
That shift won’t necessarily lead to higher monthly payments for buyers, because the higher mortgage costs will likely lead to a commensurate decline in house prices. The size of that effect could vary by market, with many California markets already having fallen much more sharply than the cities in the high-cost Northeast Corridor.
Many observers have called for the government to sharply reduce the conforming loan limits, in the name of reducing the risks taken on by taxpayers on loans Fannie and Freddie buy or guarantee.
But the administration has been eager to limit the decline in house prices, due to their large effect on consumer spending and the health of the banking system. With interest rates rising and house prices falling again nationally, it is unlikely the White House will be aggressive in further reducing those limits.
In another shift that stands to drive up costs, the administration will shrink the size of loans that can be purchased by another federal agency, the Federal Housing Administration. The government said it will also raise the fees FHA borrowers pay for the third time in four years, in a bid to shrink the agency’s business and the associated taxpayer risk.
The FHA accounted for 19% of purchase mortgage originations last year, up from just 4% in 2007.
These changes, at the margin, will drive up loan costs and add weight to house prices. But cheap money and high house prices were part and parcel of the bubble, and we are paying for those policies now via the massive tab for propping up Fannie and Freddie. No pain, no gain.
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