Realty Check

Limiting Loans or Letting Loose Again?  The Fannie/Freddie Conundrum

Treasury Secretary, Henry Paulson

There's a lot of talk on the Hill today about raising the conforming loan limit for Fannie and Freddie from its current $417,000. Treasury Secretary Henry Paulson said, "There is little question that allowing the GSEs to securitize jumbo mortgages would give a short term lift, which would be helpful to a segment of the housing market that has shown some recent improvement but is not functioning as normal."

Then, Fed Chairman Ben Bernanke said, "Raising the conforming-loan limit would expand this implied guarantee (by that he means a really non-existent guarantee that Fannie and Freddie are somehow fully insured by Uncle Sam) to another portion of the mortgage market, reducing market discipline further."

So I decided I didn't know enough about the CLL (sorry, it's too long to write out, so I'm making that up) to discuss it wisely, and have hence done some research. I was interested to find that from 1990 to 1999, the CLL jumped from $187,450 to $240,000, which if my Outlook calculator is correct is $52,550.

From 2000 to today, the CLL rose from $252,700 to $417,000. That's 164,300!! Since the CLL is based on an assessment of home prices, that's a pretty scary indicator of how price appreciated positively soared during this recent housing boom.

What's so interesting to me is that "Agency" (which means Fannie and Freddie) mortgage backed securities, went from 80% of the total in 2001 to 44% in 2006. This year of course that number is climbing back up into the 50%s.

So during the housing boom, the markets really dumped Fannie and Freddie and opted for Non-Agency MBA's obviously because they reaped greater rewards. Now they want to go back to the old standard.

So back to my original question: is raising the cap on the conforming loan, which allows Fannie and Freddie to sell higher-priced loans, just a big ol' bailout of a market gone awry and a message that says, "Okay, you screwed up, we'll just raise our loan limits to help you out"? And if the loan limit is actually based on home prices, which are actually going down, then isn’t this a bigger bailout than even its face value?

I know this is complicated. TRUST me, when I pitched this beat it was because I liked snooping through million-dollar homes. But this stuff is critical to the markets, housing, and the value of your personal portfolio, which I used to call your wallet.

The trouble is that Bernanke and Paulson only want the loan limit raised if it goes along with GSE reforms. So guess what, it's political. Bernanke said it himself, "If this goes ahead without any reform, then reform wouldn't be effected."

It seems the administration wants to trade the cap for the reform it's been trying to get for years, including greater oversight of Fannie and Freddie. Which begs another question: is the former worth the latter?

Questions?  Comments?