Wednesday's Journal takes a look at the first real test of the government's efforts to take a toe out of the mortgage market. Come October, the government will modestly reduce the maximum loan size that government entities can guarantee in certain high-cost housing markets.
In 2008, Congress raised the maximum loan amount that mortgage giants Fannie Mae and Freddie Mac and federal agencies could guarantee in certain housing markets. Home buyers in dozens of cities faced a credit squeeze when private lenders pulled back from originating loans that exceeded $417,000, the limit for government-backed loans. The higher limits are pegged to local prices and in the priciest markets rise as high as $729,750. After September, they'll fall on a sliding scale depending on regional home prices, topping out at $625,500.
The decline illustrates the tough balancing act facing policy makers, particularly at a time when housing markets appear to be softer than many had hoped they would be at this point in the recovery. Without government-backed loans, buyers must take out jumbo mortgages that carry higher rates and tougher qualification standards.
"It's a tough call," says Richard Green, director of the University of Southern California's Lusk Center for Real Estate. While he says it's a "good natural experiment" to rollback lending support for higher-priced properties, he adds, "with the housing market as weak as it is, one reasonably wonders whether it's good to do anything."
The Obama administration supports letting the limits fall in a bid to carve out more room for private capital to compete with Fannie, Freddie and the Federal Housing Administration. Government-related entities stand behind more than nine in 10 new mortgages, and taxpayers have sunk $138 billion into Fannie and Freddie, underscoring lawmakers' eagerness to dial down the government's share....