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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Okay $100k reduction is a good start but not nearly enough. We need to get the government out of lending completely. Also, FYI, part of the reason houses are still so insanely expensive in California is BECAUSE of bad public policy such as lending subsidies, nonrecourse loans, and favorable treatment for debt incured to buy residential real estate. It isn't a questio of whether or not the market can take it, it's a question of whethe ror noth the real estate trade group lobby can buy the right people off. In 2008 private lenders didn't pull out of the market, they just wanted higher down payments and interest rates to cover the considerable risks involved in lending at that time. This is appropriate. Only a real estate agent would say loans were unavaialble. Having the government step in to become the new subprime low down payment lender wasn't helping the market, it was just enabling the disfunction.

With all the criticism of Fannie Mae for aggressively reaching into the mortgage market, and for past government policies that prevailed upon it to address the issue of redlining and open up the market to low income buyers (generally associated with the subprime market), I should think this would come as good news to anyone who wants to see Fannie get back to its original (stated) purpose, and for government to assume a more responsible lending strategy. If Fannie and policy makers had been as concerned about discrimination against low income groups as they publicly maintained, and as is widely believed, why did they routinely loosen the standards over the years to include mortgages as high as $730K? (It was $250K as recently as 2000.) It should never have been that high in the first place, and only facilitated a bubble-in-progress. This marriage between Wall Street and government has to end, and with no alimony from taxpayers, homebuyers, or renters. What goes up must be allowed to come down.

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