October 20, 2011 11:12AM

Fannie Mae Loan Limits: The Empire Strikes Back

Perhaps it was naive of me to believe that the public good, the taxpayer, might actually win one over the special interests.  As I've previously noted, on Oct 1st, the maximum loan size that Fannie Mae and Freddie Mac could purchase declined.  But it seems the special interests in the real estate-industrial complex were not willing to let that go.  Currently on the floor of the Senate is the annual appropriations bill for HUD.  Pending to that bill is an amendment by Senator Menendez that would extend the existing loan limit until December 2013.

First lets start with some basic facts.  The decline would impact at most 10 percent of the mortgage market, maybe around $140 billion in mortgages.  Given that banks have about a trillion in cash on their balance sheets and would only need about $20 billion in capital to support this level of mortgage lending, it should be crystal clear that there is more than sufficient capacity in the banking industry to absorb this segment of the mortgage market.

While I am open to any suggestions to reduce the role of Fannie Mae and Freddie Mac, lowering the loan limits appears a reasonable start.  The burden of that decline would fall on the rich and upper middle class, those most able to afford it.  If we can't start ending housing subsidies for those that are well-off, how can we ever expect to get the real estate-mortgage industry out of the pocket of the taxpayers?  Haven't we allowed the banks to pass enough of their risk onto the backs of the taxpayers?