The federal government is about to back mortgages of nearly $1 million for the first time.
The maximum size of home-mortgage loans eligible for backing by Fannie Mae and Freddie Mac are expected to jump sharply in 2022, a reflection of the rapid appreciation in home prices nationally over the past year.
The increase may make it easier and cheaper for some borrowers to buy a home, particularly in more expensive areas of the country, but the higher limits are also likely to elevate debate about how big of a mortgage is too big to be backed by the government.
It’s easy enough to understand why the increase has happened. As the WSJ explains, the limits are “updated annually using a formula that factors in average housing-price increases nationwide.” In certain parts of the country where housing is expensive, that updating will take the limit up to close to $1 million. We will know the exact numbers at the end of the month.
At the same time, we are living at a time of substantial house-price inflation (existing-home prices rose by 16 percent in the third quarter compared with last year, the fastest rate in more than half a century). At least arguably, this increase will add more fuel to a fire burning merrily away, for the most part because of underbuilding and, somewhat ironically under the circumstances, ultra-low interest rates (mortgages that fall below the limit will, thanks to Fannie and Freddie’s backing, typically be cheaper). However, the magic word here is “arguably.” With borrowing costs so low, it is questionable how much difference the Fannie and Freddie backing would make to prices, certainly at the higher end.
That said, it might be a time to take advantage of today’s low rates by at least freezing the level of support, particularly at higher dollar amounts. After all, as the relatively recent past has shown, government exposure to what looks like a distinctly bubbly real estate market is not without its risks, and, as for increasing it, well . . .
The Wall Street Journal article:
some housing experts say the expected jump in loan limits raises questions about the appropriate role of the government in housing and whether taxpayers should effectively backstop sky-high housing prices, when Fannie and Freddie’s market share is already rising…
[And some] favor policies that would eventually wean the mortgage market off government support and allow the market for nongovernment-guaranteed mortgages to take a bigger role, particularly for high-dollar loans.
“We’re continuing to go down a trail in which we see the Treasury, through the backstop of Fannie and Freddie in conservatorship, backing larger and larger loans, taking up more and more of the market,” said Ed DeMarco, a former top FHFA official who is now president of the Housing Policy Council, a housing-industry trade group. “At some point, you would expect Treasury and the Congress would want to ask, is this really where we want to be going?”
Mr. DeMarco’s group favors the FHFA using its powers as conservator of Fannie and Freddie to either freeze or drop the loan limits, essentially overruling the annual formula that calls for a rise in loan limits.
Worth considering, I reckon.