I’m not too concerned about raising the conforming limit for Fannie and Freddie. These are still private enterprises, and they have pretty good incentives not to guarantee junk loans. They’re trying to make a buck first, and appease the politicians second. Sure, if they fail, we’re on the hook for their losses, but I bet they won’t fail.
However, I’m very concerned about the new FHA limits and the entire down-payment assistance issue. The FHA is an arm of the government, and they could potentially underwrite or guarantee a lot of junk loans. If they take big losses, they’ll just get money allocated in next year’s budget to cover them (like the Post Office, for instance). It wouldn’t be even called a bailout. It would simply be the government (us) paying the bill for some government expense, like the Iraq war. I bet there wouldn’t even be an uproar over it (there would certainly be one if Fannie or Freddie went under and got bailed out).
Truth to be said, the FHA has done a pretty good job historically, as it’s been mostly in the black over the years. But that was partly because they were dealing with small loans. Can they correctly price risk for jumbos? I doubt they can, and I’m sure there will be great political pressure for them to be lax. That’s why it’s the FHA that worries me, not the GSEs.
