Intero Real Estate Blog

There’s a new threat in town – a proposed move by the government that especially threatens the viability of some Bay Area housing markets, which tend to be high-priced compared to the rest of the country.

The race to figure out what to do with the Fannie Mae and Freddie Mac the two “too-big-to-fail” mortgage financiers that historically have had a direct line to taxpayer’s pockets has landed on a debate about how to lower the loan limits that the government-backed entities will guarantee. In English? The fact that these two entities will back a loan for up to $729,750 in high-cost states like California enables lenders to make loans this large. Without it, lenders would likely skip the risk.

The $729,750 limit came about three years ago in order to help borrowers in high-cost areas get into loans. When you live in a place where the median home price is in the $600,000s, it’s a much-needed aspect to being able to buy a home. Without it, loans of this size and scale tend to be a lot costlier, carry higher interest rates, and can demand down payments of up to 30% – a sizable chunk of change that’s unrealistic for a lot of borrowers.

Well, folks, the time has come to debate lowering the limit once again. If the lowered amounts being talked about go through, it means that in a place like Monterey County, for example, the government would only back a loan for up to $483,000. (See Monterey County as an example in this New York Times story on the topic.)

Basically, it’s going to pull a whole bunch of buyers out of the market and put downward pressure on prices.

The two sides of the debate go like this:

1. Why should home buyers in high-cost areas be penalized? Moreover – why should sellers also be penalized by taking a large group buyers out of the market. This move would substantially slow down recovery efforts in the market. Private lenders will likely not be able to bear all the risk to keep these loans in the market at the same pace as previous years when they were backed by Fannie Mae and Freddie Mac.

Vs.

2. Why should the government continue to back high-priced mortgages? The private market will still be able to make loans to this portion of buyers in high-cost areas. Tax payers don’t want the government’s role in the mortgage market to be as big as it has been. It costs them too much money.

The loan limits were $417,000 everywhere in the U.S. before the economy tanked in 2008. New limits would be determined by various formulas – so they’ll be different for each area.

The topic presents a difficult choice. I don’t think we should be kicking the market while it’s down and certainly lowering limits to the extreme noted in the Monterey County example would cause a hardship. But I also agree that the government’s role in the mortgage market should be minimized a bit to take the strain off tax payers when things go south.

The National Association of Realtors is lobbying to extend the loan guarantees. I think this is the right way to go. Let’s at least let the markets ride out the rest of the downhill battle and deal with foreclosures. Then we can start to lower these limits to more reasonable levels for both sides. Doing it too soon, though, would be perhaps the riskiest move to come out of regulators thus far.