Stop the Steamroller

Wednesday, January 30, 2008

THE SENATE is busily adding new tax and spending measures to the $150 billion economic stimulus package that President Bush and House Speaker Nancy Pelosi (D-Calif.) announced last week. But there's at least one item it ought to delete: a huge increase in the size of the mortgages that Fannie Mae and Freddie Mac may back, from $417,000 to perhaps as much as $729,750. Sold as much-needed relief for the housing market, this change would shift major new financial risks onto the government's shoulders, for the benefit, mostly, of people who buy and sell expensive houses.

Details of the proposal have yet to be finalized. But a recent analysis by Fannie and Freddie's regulator suggests that the measure would mostly serve families with incomes well above $150,000 per year. The Stanford Group, a financial services company based in the District, suggests the biggest winners would be in California markets such as San Francisco, where the median home price is $825,400. Perhaps not coincidentally, this is Ms. Pelosi's district. The Bush administration had wanted to wait at least until the Senate passes long-delayed legislation to tighten regulation of the government-backed companies, but Treasury Secretary Henry M. Paulson candidly admits that he yielded to a bipartisan House "steamroller."

The ostensible problem this measure would solve is the recent spike in interest rates on "jumbo" home loans -- mortgages larger than the current Fannie-Freddie cap of $417,000. In the first half of 2007, the "spread" between "jumbo" and "conforming" loans was less than a fifth of a percentage point; it has roughly quadrupled since. Consequently, home sellers in high-cost cities such as San Francisco, Boston and New York must charge less, exerting downward pressure on all nearby house prices.

Allowing Fannie and Freddie to buy up and securitize large numbers of "jumbo" loans would prop up prices in these areas. But it would also transfer these loans' elevated risk to the companies, whose ultimate guarantor is the federal taxpayer. Does a Fannie-Freddie collapse seem farfetched? Well, they have been losing money lately and are subject to increased capital requirements because of past accounting scandals. They have no experience with "jumbo" loans. And bolstering expensive residential real estate is hardly consistent with the companies' statutory mission to promote affordable housing.

Yes, $417,000 doesn't buy much house in San Francisco. But isn't at least part of the answer to let house prices moderate, so that you no longer have to be a plutocrat to live in Beacon Hill or Manhattan? We are told that the increased loan limit would lapse in a year or so. Don't be too sure: What politician will want to take away this lucrative benefit a year from now? Steamroller or not, someone in the Senate needs to stop it.


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