THE HOUSING MARKET is still in deep trouble. Prices nationwide have fallen by about a third since the peak in 2006 — and they appear to be trending down again. The resulting hit to household wealth may hinder the recovery, which is already sluggish. Small wonder that various advocates for housing are once again asking Washington for help.
But in at least one area, the prescription would be worse than the disease. We refer to calls for extending the current elevated limit on the size of loans eligible for securitization by Fannie Mae and Freddie Mac, the mortgage-finance giants operating under government control. Congress “temporarily” raised the limit to a maximum of $729,759 in certain markets in response to the sudden evaporation of private liquidity during the 2008 crisis, but that measure is set to lapse at the end of September. At that point, the limit will not revert to the pre-crisis maximum of $417,000 in most of the country but to a level set in relation to local medians — and capped at $625,000.
Critics of the scheduled shrinkage argue that it will force up interest rates for homebuyers in relatively expensive markets, such as the San Francisco Bay area, thus forcing losses on middle-class homeowners who are trying to sell houses they stretched to buy in the first place. The effects, it is argued, will cascade throughout the housing market, since Fannie and Freddie (and other federal institutions) currently back about 90 percent of mortgages.
But the Obama administration has supported a reversion to lower loan limits as the first step in gradually reforming the mortgage security market and reducing taxpayer exposure to Fannie and Freddie. The administration’s goal is to lure cash-rich would-be mortgage securitizers back into the market, starting with the high end. Treasury Secretary Timothy F. Geithner has described this as “crowding in” private capital, and it is the rare housing policy proposal that has enjoyed a measure of bipartisan support.
As well it should: No doubt buyers and sellers of homes, and those who make their livings off the transactions, would prefer to extend as much government subsidy as possible for as long as possible. But predictions of a housing rout after September are overblown. The market for home loans above $730,000 — so-called “jumbo” mortgages — is already in private hands. It’s hard to see how increasing the private sector’s share to loans above a still-pricey $625,000 would trigger catastrophe.
Given the strong national interest in weaning residential real estate off federal support, expensive houses would seem the best and fairest place to start, even if it means tougher loan terms for buyers and sellers of pricey real estate. And now is an appropriate time to take the risk, since prices are no longer in free fall, even if they are not yet back on the rise.
The Obama administration should stick to its guns, and Congress should not equivocate. It may hurt at first. But the nation’s finances can’t truly stabilize until upper-middle-class Americans kick their dependency on federal mortgage aid — and sooner is probably better.
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