Lower the Loan Limits on Mortgages Guaranteed by Fannie Mae and Freddie Mac

The Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) are government-sponsored enterprises (GSEs) that were federally chartered to help ensure a stable supply of financing for residential mortgages, including those for low- and moderate-income borrowers. Over the past 40 years, Fannie Mae and Freddie Mac have carried out that mission in two main ways: by issuing and guaranteeing mortgage-backed securities (MBSs) and by buying mortgages and MBSs to hold in their portfolios. Under current law, the entities are temporarily able to purchase and guarantee mortgages in amounts up to $729,750 in areas with high housing costs, although that limit will fall to $625,500 after September 30, 2011. The limit outside of high-cost areas currently is $417,000, and regulators can raise that limit if house prices rise. The two GSEs provided credit guarantees for over 60 percent of home mortgages originated in 2010, and they also purchased and retained mortgages.

In September 2008, the federal government took control of Fannie Mae and Freddie Mac in a conservatorship process after falling housing prices and rising mortgage delinquencies threatened the GSEs' solvency, impairing their ability to ensure a steady supply of financing to the secondary mortgage market. With that shift in control, the Congressional Budget Office concluded that the institutions had effectively become government entities whose operations should be reflected in the federal budget.

This option would set a maximum loan limit of $417,000 nationally beginning in 2013 and freeze that limit going forward. The option would retain the scheduled reduction--to $625,500 starting October 1, 2011--in the loan limit for high-cost areas; thus, no savings would be realized in 2012. Lower loan limits would reduce federal subsidies for the GSEs by roughly $1 billion over the 2012-2016 period and by almost $4 billion from 2012 to 2021. For consistency, similar changes could be made to the Federal Housing Administration's (FHA's) loan limits. Lower limits for FHA loans would affect discretionary spending subject to appropriations, but the effects of such changes are not included in these estimates.

The major advantages of this option are that it could provide a transition path from conservatorship and restore a role for the private sector in the secondary mortgage market while reducing taxpayers' exposure to the risk of defaults. Current loan limits, which are high compared with the median price of about $170,000 for an existing single-family residence in 2010, leave little scope for a private secondary market, which had been significant before the financial crisis. The option would also lower subsidies to affluent borrowers, for whom home ownership is already subsidized through the tax code. Another advantage of the option is that it would probably reduce the amount of capital allocated to housing and shift it toward other investments that would be more productive.

One disadvantage of this option is that housing markets remain fragile and any reduction of federal support might further weaken those markets. The effects would be greatest in high-cost areas, although some of the negative effects might be mitigated through increased reliance on FHA loans. Another disadvantage is that mortgage markets might become more prone to disruptions in the supply of credit during periods of acute financial stress. amounts between $417,000 and $625,500 would pay Reducing the subsidies would also mean that some borinterest rates that would probably be about a quarter of a rowers would pay more for mortgages; in particular, once percentage point higher than under current law. markets stabilized, borrowers seeking mortgages in