I can't think of a more preposterous and irrational example of exuberant upside bias on the part of the Federal government then that of the recent toiling over the OFHEO conforming loan limit.
For those of you that are not yet familiar, the Office of Federal Housing Oversight (OFHEO) is the government agency that is responsible for regulating the two primary Government Sponsored Enterprise (GSE) mortgage giants, Fannie Mae and Freddie Mac.
One of the main, if not THE main, role of OFHEO is to set the “conforming loan limit”, a maximum loan value that is used to act as the threshold between a “safe” loan that Freddie Mac and Fannie Mae are allowed to purchase and an “unsafe and unsound” loan “running contrary to statute”.
This is how the “conforming” vs. “Jumbo” loan is defined… below the limit is “conforming” above is non-agency “Jumbo”.
Currently, the limit for a single family home is $417,000, pretty frothy when you consider that, only as far back as 2000, the limit stood at $252,700.
Keep in mind that this means that an average home buyer can go to a mortgage broker, bank or other lender and borrow as much as $417,000 of home loan principle and still remain eligible for GSE underwriting that carries a lower rate of interest since GSE loans are assumed to be backed by the full faith and credit of the federal government (this assumption is really a bit of a myth… but that’s a post for another day when things really start to quake!).
So how is it, you ask, that the limit nearly doubled in roughly 5 years (keep in mind, it was set to $417,000 in November 2005)?
Easy, when the home prices went up, they simply raised the value (for more detailed information on how they change the limit, see my prior post on the subject).
But now comes the sticky part… now that home prices are going down, what are they doing to the limit?
The answer is surprise… OFHEO is coming up with all sorts of oddball ways of keeping from having to lower the limit (see my past two posts on the subject)
In fact, in 2006 when home prices declined which, according to their prior inflating methodology, should have resulted in a reduction of the conforming loan limit, OFHEO revised their guidelines and left the limit unchanged.
Now in 2007, home prices are going to fall again, only this time by a likely far more significant percentage and what has OFHEO done in response?
They have revised the guidelines once again, effectively postponing any decrease until certain conditions are met (again, see my prior post on the subject).
After soliciting public comment in June and July about the proposed changes to the guidelines, OFHEO received a number of respondents, particularly the National Association of Realtors (NAR), the National Association of Home Builders (NAHB) and the Mortgage Bankers Association (MBA) as well as Fannie Mae, Freddie Mac and a whole raft of two-bit mortgage lenders who expressed clear opposition to the changes NOT because they would leave the limit unchanged BUT because they feel OFHEO should NEVER LOWER THE LIMIT!
ONLY UP... NEVER DOWN!
If that weren’t outrageous enough, there has been much talk for the last few days coming from Congressional figures such as Representative Barney Frank (D-MA), the Chairman of the House Financial Services Committee, who actually prefers that the limit be INCREASED, even in the face of two years falling home prices!
The point of this, obviously, would be simply to force Fannie and Freddie to effectively “re-liquefy” the now totally stalled Jumbo market.
Apparently though, both Treasury Secretary Paulson, and Senate Banking Chairman Dodd (D-CT) have expressed that it will take specific legislative action in order to allow OFHEO to raise the conforming limit above the current level.
Now, I’m not very sure why they have concluded this as OFHEO just modified its procedures for lowering the value without any legislative debate whatsoever, but it really makes no difference.
If you listen closely to Dodd, Frank and Paulson, they are all saying the same thing namely it will take legislative action and the legislation is on the way.
This is one of the most egregious examples of a dimwitted Congressional-Federal assault on the “free” markets I have ever seen.
They, in the supposed well meaning attempt to help “average” Americans, are essentially attempting to control the market price of residential real estate.
Don’t underestimate the severity of this fumbling.
To put it in better perspective, it has recently been estimated (in Dean Bakers latest excellent paper... hat-tip HousingPanic) that there is anywhere between $4 to $8 TRILLION of housing equity that will be lost in the process of deflating (re-pricing) the housing bubble, bringing prices back to hundred year historical averages.
That’s nearly 2 – 4 times larger than the entire 2008 Fiscal Year Federal Budget.
This means the by finagling with things like the conforming loan limit, mortgage bailout funds and foreclosure timeouts, the Federal government is attempting to use both taxpayer dollars and the full faith and credit of our government in order to maintain absurdly inflated housing values and the artificial wealth this boom created.
This would clearly create a moral hazard of unparalleled proportions.
Remember, Jumbo loans were most frequently used by upper middle class affluent home buyers, and for the ones that are now in trouble, the ride down will be painful.
But that is the price you pay for taking a risk in a “free” market.
And who better to take this hit than Americans with generally good incomes and employment opportunities.
If the government is smart it will allow this natural correction to take place unfettered, permitting scores of Americans to learn a valuable life lesson.
