October 7, 2011 12:22PM

GSE Loan Limits Decline: Taxpayer 1, Special Interests 0

On October 1st, the maximum mortgage size that can be purchased by those two financial wonders, Fannie Mae and Freddie Mac, declined in higher‐​cost housing markets from $729,750 to $625,500. The surprise is that the scheduled decline occurred despite the fact that the entire real estate and mortgage industry were lobbying for an extension. Even the banks that might normally compete with Fannie and Freddie wanted an extension. No one, except of course the taxpayer, was going to benefit from letting this ceiling drop. Yet it happened anyway. Perhaps there is some hope for Washington.

For those who will whine that this spells the end of the mortgage market, the facts speak otherwise. As I have detailed elsewhere, there is plenty of capacity in the banking industry to absorb this small decline in the GSEs’ footprint. If anything, we should be lowering this limit even more. And if data and analysis aren’t enough for you, I personally was just approved for a mortgage in D.C. that is over the new $625,500 limit. (Yes, housing here in D.C. is quite expensive.) The difference in cost? A fourth of a percentage point. I, for one, am more than willing to pay an extra 25 basis points to get Fannie and Freddie out of the pocket of the taxpayer. 

A common defense of the higher limit is that it isn’t fair to higher‐​cost areas like sunny California. Setting aside the fact that these areas are higher‐​cost due to their own regulations that restrict the supply of housing, anyone who can afford a mortgage above $625,500 can also afford to get that mortgage without having to be subsidized by the taxpayer. Of course, a simple solution—other than the obvious one of getting rid of Fannie and Freddie altogether—is to eliminate the loan limits altogether and tie eligibility to income. If this is about helping the “middle class,” then let’s limit the benefit to the middle class.