About a month ago I wrote a post about how the National Association of Realtors (NAR) throws around their considerable lobbying weight to preserve the various housing market subsidies bestowed by the government. I specifically wrote about the FHA loan limits and the Homeowner Flood Insurance Act. However, there is another issue lurking around out there that is potentially a bigger deal to the housing market - bigger but not huge in my opinion: the conventional loan limits for Fannie Mae and Freddie Mac.
As a refresher Fannie Mae and Freddie Mac are these strange government sponsored private entities that help provide liquidity to the mortgage market by buying up mortgages, packaging them in mortgage backed securities, and then reselling the packages into the financial markets. Currently they buy mortgages up to $417,000 for single dwellings in most parts of the country and a bit more in higher cost areas and they are about 2/3 of the secondary mortgage market.
Surprisingly there appears to be growing consensus in Washington, including people like President Obama and Barney Frank, that these government sponsored entities have become too big a player in the market and it's time for the private sector to take on a bigger role. I think the fact that these entities took huge hits during the mortgage crisis and required their own government bailout (which for a while looked like it might never be recovered) made it clear that something needed to change. And the most logical way to phase out their involvement is to cut back the loan limits on what they can buy and raise the fees they charge to provide their service.
So over the last few months there has been a lot of discussion about making these changes and, no surprise, the NAR has been very vocal in these discussions. Basically they never met a government housing program they didn't like and didn't want to preserve just the way it was - unless it could get even more generous. In mid-September the NAR sent a letter to the Federal Housing Finance Agency challenging their rights to make these changes and pointing out that they have over 1 million members. They also made the usual arguments about how fragile the housing market is and how everyone deserves to own a home and now they can't. OK, maybe I am exaggerating just a bit here but read their letter and see how they try to make that emotional appeal - as if the private market can't fill the vacuum and it's a binary function.
Initially the various realtor groups "applauded" what looked like a decision to hold these loan limits throughout 2014. That was in late November. However, by mid-December it became clear that cutting the loan limits was not off the table for later in 2014 as reports surfaced that the FHFA was seeking comments on reducing the limits from $417K to $400K effective October 1.
But here's what I find really interesting. For all the realtor wailing and gnashing of teeth this Inman News article puts things in perspective with the following two facts:
- According to the Calculated Risk blog if the loan limits had been adjusted downward with falling home prices it would be around $360K today.
- According to the FHFA's own impact analysis we are only talking about a 2.9% reduction of Fannie and Freddie's activity.
So what exactly is the NAR all hot and bothered about?
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