To anyone who will think that increasing conforming loan limits would be good… think again!
Think of it this way. It makes it easier to get financing at low rates.. which just like the low interest rates and funky financing that got us into this problem in the first place, will drive up the price of houses. Normally you get a lot more house per dollar when you get over about $500K in most markets. This change would move that breakpoint up to about $800K. Basically what is happening here is an attempt to re-inflate the bubble as well as the banks/money managers trying to shove off their bad loans onto Fannie Mae/Freddie Mac (no one wants to pick them up at the price that the banks want to sell them at, and the banks don’t want to write the value down to sell it. Remember Warren Buffets comment that they should mark to market not mark to model.).
It seems that many people have an obsession with thinking lower interest rates make a house more affordable. It doesn’t. It is actually makes it more expensive because it increases realizable demand at that price level thereby driving up the price not to mention property taxes and insurance costs. Imagine what house prices would be if interest rates were 15%? A higher interest rate means your down payment goes a lot further. The way to profit from RE is to buy when rates are high, sell or refi to a lower fixed when rates are low.
There is another problem here too. Freddie Mac and Fannie Mae already have a problem on loan loss reserves. Allowing them to pick up loans with a higher face value will not make this better.. it makes it a lot worse. If either of these institutions fails, guess who picks up the tab? The taxpayer. Both of these institutions are guaranteed by the US gov and thereby the taxpayer.
