Argument: increase the value of federally-backed mortgages, finance more McMansions

With a headline of “Rising Loan Limits Are a New Federal McMansion Subsidy,” the editorial board of the Wall Street Journal does not approve of recent mortgage changes:

Photo by Andrea Piacquadio on Pexels.com

The Federal Housing Finance Agency (FHFA) said Tuesday it will increase the maximum size of mortgages that Fannie and Freddie will cover—known as the conforming loan limit—to $1,089,300 in high-cost areas from $970,800 this year and $765,600 in 2020. The conforming loan limit in other areas will rise to $726,200, from $510,400 two years ago…

Instead, the Administration wants to prop up housing demand and prices by raising the guarantee limit. This will please the Realtors and affluent, especially in California areas where the median home price exceeds the new limit, such as Orange County ($1.2 million), San Francisco ($1.3 million) and San Jose ($1.7 million).

Sorry to state the obvious, but anyone who can qualify for a million-dollar mortgage doesn’t need the government to subsidize it with a guarantee. The average 30-year interest rate on a jumbo loan is 6.8%, which is similar to a government-backed mortgage.

Borrowers with jumbo loans tend to have higher incomes and credit scores. But these mortgages are getting riskier as borrower monthly payments have risen faster than incomes. Layoffs are increasing in higher-paying fields like tech, and a recession could result in foreclosures. The FHFA is expanding the taxpayer liability at an especially risky time…

The more the government intervenes in the housing market, the more damage it does.

There is a lot here that relates to work I have done. A few thoughts in response:

  1. The final line is interesting. Is the assumption that the federal government should not be very involved or involved at all in the housing market? One journalist reported this quote from a European finance official a few years ago: “Most countries have socialized health care and a free market for mortgages. You in the United States do exactly the opposite.” This government intervention was instrumental in helping to create suburbs and promote homeownership.
  2. This move might help people in more expensive housing markets. Does one have to be rich to access housing in Orange County or San Jose or is this needed because the housing prices are so high there?
  3. The headline mentions McMansions but the word is not used in the editorial. Is the term shorthand for expensive homes? Or, commentary on the kinds of homes people with this level of resources purchase? Is the Wall Street Journal against McMansions? (If I had to guess based on my work looking at the use of McMansion in the New York Times and the Dallas Morning News, the WSJ would fit somewhere in between these two sources.)

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