I know I am little late to the party, but the government is considering lowering the FHA (Federal Housing Authority) and GSE loan limits* to their pre 2008 crisis levels. These government authorities currently back loans up to $417,000, or 125% of the median homes price in particularly pricy areas (Think San Francisco or New York City), whichever is higher. If congress does not re-up the legislation, then the $417,000 loan limit remains in place, but the 125% would fall to 115%.
*GSE is really just Fannie Mae and Freddie Mac, the government companies that insure loans. Together, Fannie, Freddie, and the FHA have backed a high percentage of loans, especially since the financial crisis in 2008.
That percentage change doesn’t seem like a big change, but it potentially affects millions of homes and would be home buyers. And it has caused a mighty uproar at NAR who will now be funneling money as a special interest group to stop the decrease in the limit. (The one thing I hate more than taxes are special interest groups, even ones that “fight on my behalf”.)
Now, as you can tell by the fact that I write on a blog for a real estate website, you would think I favor subsidies to the real estate market. However, I strongly favor rolling back the limit to the pre-crisis amount of 115%. Here’s why:
- The government should be getting out of the mortgage lending business, not increasing its market share
- Prices will come down
- The government should spend it’s time helping people underwater re-work their mortgages
- I hate subsidies, even if they would potentially benefit me
The Less Government in Mortgage Lending, the Better: The government is serving a niche of people that would not otherwise qualify for loans, which sounds good, but really means that they are insuring loans on people that have some sort of credit risk. That’s what got us into this mess, relaxed credit standards.
Prices Will Come Down: House prices in these pricey areas will have to come down as fewer people will be able to afford them. That is technically bad for sellers, or would be sellers, as the price is lowered, but great for buyers. Prices are artificially high because of the high loan limit, they would start to come back down to a fair market value.
The Government Should Re-Structure Mortgages: Because prices will fall, more borrowers will be underwater. The government should then step in and help home owners restructure their mortgages to the new reality we live in. The market, at this point, needs stable, realistic pricing for its long run health.
I Hate Subsidies: This last point is just a personal pet-peeve of mine. I don’t believe the government should mettle in markets it has no business being in. Trying to control asset prices, like real estate, is extraordinarily hard. The government should try to regulate the market instead of being a part of it.