Rising Loan Limits Are a New Federal McMansion Subsidy

 Biden’s housing regulator order taxpayers to underwrite million-dollar mortgages

WSJ editorial.

"The Federal Reserve’s loose monetary policies fueled housing inflation, and now rising mortgage interest rates are pricing out buyers. So what does the Biden Administration do? Guarantee million-dollar mortgages, which will expand the taxpayer liability and housing-market dysfunction.

Congress created government-sponsored enterprises Fannie Mae and Freddie Mac to guarantee middle-class mortgages and make housing more affordable. Now the Administration is turning a government-backed mortgage into an entitlement for the affluent in coastal areas where zoning regulations drive up prices.

The Federal Housing Finance Agency (FHFA) said Tuesday it will increase the maximum size of mortgages that Fannie and Freddie will cover—known as the conforming loan limit—to $1,089,300 in high-cost areas from $970,800 this year and $765,600 in 2020. The conforming loan limit in other areas will rise to $726,200, from $510,400 two years ago.

Home prices surged during the pandemic as record low interest rates and the Fed’s purchases of mortgage-backed securities reduced costs for buyers and fueled demand. But what the Fed giveth to homebuyers, it taketh as it combats inflation. The interest rate on a 30-year mortgage has averaged 6.8% this month, up from about 3% a year ago. 

Higher interest rates have increased the monthly mortgage payment for the median $454,900 home by about $800 in the last year. In metro areas like Boston, Washington, D.C., and California’s Bay Area, where many homes can sell for more than $1 million, new buyers are having to shovel out $2,000 more per month for a mortgage than a year ago.

New home construction is falling, which could weigh on the economy as housing helps drive demand for household goods. But a correction is overdue and would prevent the housing mania that ended in tears in 2008.

Instead, the Administration wants to prop up housing demand and prices by raising the guarantee limit. This will please the Realtors and affluent, especially in California areas where the median home price exceeds the new limit, such as Orange County ($1.2 million), San Francisco ($1.3 million) and San Jose ($1.7 million).

Sorry to state the obvious, but anyone who can qualify for a million-dollar mortgage doesn’t need the government to subsidize it with a guarantee. The average 30-year interest rate on a jumbo loan is 6.8%, which is similar to a government-backed mortgage.

Borrowers with jumbo loans tend to have higher incomes and credit scores. But these mortgages are getting riskier as borrower monthly payments have risen faster than incomes. Layoffs are increasing in higher-paying fields like tech, and a recession could result in foreclosures. The FHFA is expanding the taxpayer liability at an especially risky time.

After Fannie and Freddie went bust during the housing meltdown, they were placed under government conservatorship and received a $190 billion bailout from Treasury. We argued for shrinking the taxpayer backstop by reducing the conforming loan limit. Instead, the limit has increased by 75% since 2015, which has boosted home prices and taxpayer liabilities.

The more the government intervenes in the housing market, the more damage it does."