In 2008, the United States federal government essentially nationalized the mortgage market. Now Uncle Sam is erratically but surely pulling back. For the past three years, Fannie Mae and Freddie Mac have bought home loans up to $720,000. Now they’ve stepped away from that market, only buying home loans up to $417,000.
FHA limits have declined dramatically as well. The FHA (Federal Housing Administration) has financed up to half of all home purchases in recent quarters because the FHA only requires a minimum down payment of 3.5%.
Without the government guarantee, private sector jumbo mortgages typically require .75% higher interest rates, a minimum down payment of 20% and more stringent credit standards and income documentation. Without government support, sales of expensive homes in California and New York are expected to decline. With credit shrinking for jumbo loans, home prices will go down.
Since 2008, there has been little market for non-government backed MBS (mortgage backed securities). If the government steps away from the jumbo mortgage industry, will this private market rebound? Banks and other big money sources have to invest their funds somewhere.
Why should the government subsidize jumbo mortgage loans? These are mortgage loans taken out by rich people. Why should ordinary hard-working tax-paying Americans who can’t afford to buy a home subsidize the home purchases of the rich?
The WSJ reports: Policy makers allowed the limits to fall because they want private companies to hold more mortgage risk, and dialing down loan limits is one way to carve out space for those investors. Fannie, Freddie, and the FHA currently back nine in 10 new mortgages. Taxpayers already are on the hook for $141 billion in losses at Fannie and Freddie, and the FHA’s reserves have plunged to razor-thin levels.