As legislation moves through Congress to address the fate of Fannie Mae and Freddie Mac, the Federal Housing Finance Agency (FHFA) has indicated it will decrease the limit on the size of the loans these institutions can purchase starting in 2014.
The FHFA should decrease the loan limit independent of any action in Congress that deals with Fannie and Freddie. This change of policy is an easy step to reduce Fannie and Freddie’s market share and encourage more private capital to enter the U.S. secondary mortgage market.
Critics of this move, such as the National Association of Realtors, argue that this is not the right time to reduce Fannie and Freddie’s loan limit. Lowering the limit, they argue, would hurt the housing recovery because it would raise mortgage rates and push too many homes above the limit that Fannie and Freddie can purchase.
Despite the dramatic claims, the housing market will not come to a halt because of changes to these limits. The change to the conforming limit would likely affect only a small number of buyers in high-cost regional markets, and it would still not restrict their ability to acquire a loan—just Fannie and Freddie’s ability to buy it. According to a recent FHFA study, these sorts of reductions in the limits “are likely to have little impact on middle-income borrowers, on Hispanic and African-American borrowers, and on mortgage markets in ‘underserved areas.’”
Additionally, this policy change would occur at a time when the market for “jumbo” mortgage loans—those that are beyond the loan limits and ineligible for purchase by Fannie or Freddie—is expanding. While interest rates have increased in recent months, the increase in rates on jumbo loans is below the increase on conventional loans. This trend undercuts the claim that those pushed from the conventional market (those loans that Fannie and Freddie can buy) to the jumbo market (those loans Fannie and Freddie can’t buy) would necessarily face higher hurdles and costs to borrowing in the U.S. mortgage market.
The reduced loan limit would lower the price on mortgages Fannie and Freddie can purchase from mortgage lenders and thus start the process of phasing them out of the U.S. secondary mortgage market. It is long past the time to get the government out of the housing market and to encourage more private capital to enter it.