In a recent issue brief written by National Taxpayers Union and Citizens Against Government Waste, we commended the Trump administration for their comprehensive plan to rein in the housing behemoths Fannie Mae and Freddie Mac. Their blueprint should restart the housing reform conversation and make Government-Sponsored Enterprise (GSE) reform a priority for the 2020 legislative session. Given that taxpayers guarantee more than $6.3 trillion in U.S. residential mortgages, it’s imperative policymakers shrink the government’s footprint in the U.S. housing market and lessen the probability of another taxpayer-funded bailout of the GSEs.
However, last week, the Federal Housing Finance Agency (FHFA) announced a misguided decision to allow the GSEs to back larger, more expensive mortgages. Starting January 1, 2020, the baseline conforming loan limit, which is the maximum mortgage amount Fannie or Freddie can purchase, will increase to $510,400 from $484,350 in 2019. For homes in high cost areas, the limit will rise to $765,600, up from $726,525.
Increasing the maximum loan limit means taxpayers will be on the hook to underwrite even more mortgages and will be exposed to even more severe losses in the event these borrowers default on their obligations. Not only would the higher conforming loan limit increase risk for taxpayers, it would take business from a willing private mortgage insurance market and dramatically undermine the prospects for true housing policy and GSE reform in the future.
Some argue that FHFA actions are necessary because reducing loan limits would hurt the housing market and result in higher interest rates for borrowers, but that’s not entirely true. For homebuyers above the limit, there is no shortage of mortgage options. These credit-worthy borrowers can look to banks and other private mortgage securitizers to underwrite their loans. It’s as simple as shifting liabilities from the government’s balance sheet onto the private market. Gradually reducing the conforming loan limits would reduce taxpayer risk, end a subsidy for higher-income borrowers, and allow the GSEs to focus lending to those on the lower-end of the income scale. In doing so the U.S. housing finance system will become a largely private market without adding liabilities onto taxpayers’ laps
Under vague language in the Housing and Economic Recovery Act of 2008, some argue the FHFA Director has the authority to reduce the conforming loan limit at any point. However, if FHFA Director Mark Calabria believes this not to be the case, Congress should either amend current law to allow for scheduled decreases to the mortgage limit, or explicitly give the Director the authority to reduce the ceiling.
Right-sizing the government's role in the housing market remains the single most unfinished businesses of the financial crisis. While Director Calabria has already made meaningful progress to mitigate taxpayer losses, increase capital, and promote competition, much more work remains ahead. We believe a good place to start would be by reducing the conforming loan limits.