“if raising the conforming limits doesn’t work because the underwriting is too tight to allow home prices to stay high, then they will loosen the underwriting criteria. Investors buying the mortgages won’t do anything to stop this because they know payments on the loans are guaranteed by taxpayers, so it makes little difference to them if FNMA/Freddie mortgages go bust or not.”
That will simply not happen and your last sentence explains why not “FNMA/Freddie mortgages go bust”. Don’t think so. They are already under the gun. Besides once home prices begin falling such as they are now very few will be willing to take out a mortgage without the confidence that home price appreciation is certain. Loosening the underwriting criteria in a falling home market guarantees Fannie and Freddie will go bust.
