Obama Administration to Propose Reductions in Support for Housing Market, Lower Loan Limits

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According to an article in this morning’s Washington Post by Zachary Goldfarb and Brady Dennis, the Obama Administration is set to release a report detailing its vision for the future of the housing finance system in the United States.  The report will likely recommend slowly weaning the housing market off of government support.  One part of the proposal involves reducing the size of mortgage loans eligible for purchase by Fannie Mae and Freddie Mac:

“The administration is now likely to suggest that Congress allow the policy to lapse as scheduled in September, lowering the loan limit to $625,000.”

There is a statutory limit on the maximum size mortgage loan that Fannie Mae and Freddie Mac are allowed to purchase.  This is known as the conforming limit, and is presently set at $417,000 in most areas of the country.  In some areas where the median home price exceeds the conforming limit, the conforming limit is higher, up to $729,750 (175% of the conforming limit).  Examples of these high cost areas are New York City, Miami, Boston, Washington D.C., and many parts of California, among others.  Loans that fall in between $417,000 and $729,750 are referred to as high balance conforming loans. Currently there are few private investors in the high balance conforming sector because they are either unwilling or unable to match the mortgage rates that the GSEs are able to provide.

By letting the high balance conforming limit fall to $625,000, the administration hopes it will entice private investors to fund these larger loans again.  However, there are concerns that withdrawing government support too quickly could destabilize the already weak housing market.  Presently, the government backs about 95 percent of all new mortgage originations in one way or another.

The report is also expected to sketch out a rough plan for the future of Fannie Mae, Freddie Mac, and the Federal Housing Administration.  Already, the report has been delayed twice, and there are still ongoing discussions about housing policy between the White House, the Department of Housing and Urban Development, and the Treasury Department.

“The administration is not expected to lay out a detailed blueprint for a new housing finance system, sources said.  Instead, officials are expected to announce short-term steps to slightly reduce government support, such as by dropping loan limits.  The administration’s hope is that banks would feel more comfortable offering loans for higher-priced homes without government support.”

It is going to be interesting to see what the administration proposes, and what lawmakers actually do.  There is a sharp divide between Democrats and Republicans as to the role that the GSEs and HUD played in the housing meltdown, which will likely hinder efforts to enact a cohesive plan.  Stay tuned.


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