Hair of the dog

From the Wall Street Journal:

More Risk for Fannie, Freddie?

One of the features of the economic stimulus package fashioned yesterday by Congress and the Bush administration would provide guarantees to more — and much larger — mortgages in an effort to boost the housing market. But it also would expose the nation’s two government-sponsored mortgage companies to greater credit risk.

With defaults rising, investors lately have shunned nearly all mortgages not guaranteed by Fannie Mae and Freddie Mac. They assume that the two companies, which are private but were created by Congress, would get a bailout in a crisis.

Fannie Mae and Freddie Mac buy from lenders only mortgages that conform to their standards. Currently, that means the largest mortgage they will buy on single-family homes in the continental U.S. is $417,000. Their standards on down payments and verification of income are stricter than were those of many lenders during the housing boom.

Democrats and Republicans provided conflicting versions of how much more leeway the companies will get. The package agreed upon by Congress would temporarily allow Fannie and Freddie to buy or guarantee mortgages as high as $729,750 in cities with high housing prices, according to House Speaker Nancy Pelosi. House Republican Leader John Boehner put the ceiling at $625,000, according to a news release.

The higher allowance would expire Dec. 31, though it would be permanent for loans guaranteed by the Federal Housing Administration, the New Deal-era agency that typically helps low- and middle-income home buyers qualify for low-interest mortgages. Currently, FHA can’t guarantee mortgages higher than $367,000.
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Major accounting scandals severely tarnished both companies earlier this decade. But they continue to exert political power, largely because builders and Realtors see them as a vital prop for the housing market and fiercely resist efforts to constrain them.

Though the rise in the conforming-loan limit is supposed to be temporary, Congress may find it tough to reverse it in the face of warnings by builders and Realtors that such a move would cause another drop in home prices.

Yesterday, Treasury Secretary Henry Paulson said he had wanted to increase the conforming-loan limit only if Congress would pass long-stalled legislation designed to tighten regulation of Fannie and Freddie. But, he said, “I got run down by a bipartisan steamroller…Republicans and Democrats were united on this.”

There were some dissenters. Sen. Mel Martinez, a Florida Republican, said it is irresponsible to increase the loan limit without tightening regulation of the companies. “This is sort of like giving the kid the dessert before you ask him to eat the vegetables,” he said. “They [Fannie and Freddie] will exert all the political pressure they can…to ensure that there isn’t ever the kind of strong regulator they’ve got to have.”
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A spokeswoman for Freddie Mac said the company was still seeking more details on the plan. “Obviously, we will do what we can to assist borrowers and help restore liquidity to the market,” she said. “However, this additional responsibility would create a significant challenge for Freddie Mac as we continue to operate under severe capital constraints.”