Yesterday it was announced that Congress and the White House had come to an agreement on an economic stimulus package that would raise the limit for conforming home loans, those backed by government-sponsored loan securitizers Fannie Mae and Freddie Mac, from the current $417,000 to about $730,000 in the most expensive states (of which we are obviously one).

Why does this matter? Because the rates on conforming mortgages tend to be quite a bit lower than those on loans above $417,000, also known as jumbo loans. Right now jumbo loans typically carry rates more than 1 percent higher than their conforming counterparts.

And why are conforming rates lower? Because lenders think that Fannie’s and Freddie’s debt will be guaranteed by the government. There is no such explicit guarantee, but investors generally assume that the government will not let Fannie or Freddie fail, and considering how the feds have scrambled to throw money at the housing problem it’s hard to disagree with that conclusion. This government backing, whether real or imagined, makes a huge difference. Fannie and Freddie have both been mired in huge multi-year accounting scandals, and they either own or guarantee the payment of $4.9 trillion of mortgages. It is very unlikely that investors would consider them such a low-risk proposition without government backing.

But the implicit guarantee is there, and because lenders feel that makes for lower-risk loans, they are willing to lend to Fannie and Freddie at a lower rate than they would to private sector mortgage companies.

Now, just to be clear, “guaranteed by the government” always means “guaranteed by the taxpayers.” So what we have here is the government increasing the scope of an implicit taxpayer-funded guarantee in order to assure that someone taking out a $730,000 home loan can get a significantly lower rate than they could get from a non-government-sponsored lender. In other words, taxpayers will now be subsidizing the purchase of really expensive houses.

The effects of this new legislation, assuming it passes, remain to be seen. It’s clearly not going to stop the housing bust, given the current levels of high real estate valuations, inventory oversupply, and foreclosures in the pipeline. But it could cause the downturn to end sooner and with homes priced higher than would have happened otherwise. Whatever the eventual effect, this legislation amounts to an undisguised attempt to keep homes unaffordable.


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