Federal government to dial down mortgage guarantees

A mortgage application form with house keys on top of it.

Steve Chiotakis: We got news today on home prices. The Case-Shiller index inched up in July, by about a percent from June. Home prices, though, are still 4 percent lower than where they were a year ago. And you'd think it would be easier to get into the housing market for somebody. But on Saturday, the Federal government's gonna lower the size of mortgages that it'll guarantee, that it'll back -- which means people will need more money to buy, and more money to put down.

In California, where it's pretty expensive to buy a house, real estate agents are bracing for a big hit. Guy Cecala heads up Inside Mortgage Finance trade journal, and he's with us now from Maryland. Good morning, Guy.

Guy Cecala: Good morning.

Chiotakis: The government increased these loan limits in the first place, right?

Cecala: Exactly. Coming out of the credit crisis of 2008, banks were struggling to stay afloat, and one of the things they did was basically pull out of the mortgage market and refuse to make any new mortgages except those insured by the government.

This left a huge void in the so-called "jumbo mortgage" market -- which at that time was any mortgage above $417,000. So Congress stepped in and said, OK -- on an emergency basis -- we're going to cover part of that jumbo market by raising the government loan limit in high-cost areas to $729,750 -- don't ask me where they came up with that number. Come this Saturday, the loan limit goes from $729,750 to $625,500.

Chiotakis: With the housing market in such bad shape, why would they let it happen now?

Cecala: Well, that's the real estate industry's argument. The flipside of that question is -- basically, 9 out of 10 new mortgages being made are being funded or financed through the Federal government. And the idea is we never intended this to happen. If we don't start rolling it back incrementally, we're never going to get the government out of the mortgage market. And also, we're never going to encourage private lending.

Chiotakis: Can the housing market handle this, Guy?

Cecala: Another way of looking at it is -- how much business are we talking about that's at this higher loan level. Nationwide, it's probably under 5 percent. This is going to hit California harder than any area because California has most of the high-cost loan limits in place in that state than any place else.

Chiotakis: Guy Cecala, publisher of the trade journal Inside Mortgage Finance. Guy, thanks.

Cecala: You're very welcome.

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