When Congress decided in the 1930s that the federal government should help make mortgages affordable, it surely didn’t envision subsidizing buyers of million-dollar houses.
Yet, nine decades later, that’s exactly how federal housing policy has evolved. This year, the Federal Housing Administration, Fannie Mae and Freddie Mac will guarantee single-family mortgages of up to $970,800 in certain high-cost areas.
With a 4% down payment, the minimum for FHA loans, that means the federal agency will back the purchase of homes costing up to $1.01 million. With a 20% down payment, which is standard for the loans that Fannie Mae and Freddie Mac bundle into securities, Uncle Sam is helping people buy houses for up to $1.21 million.
The limits aren’t arbitrary; by law, they change each year with the average price of U.S. houses. In high-cost places like the San Francisco area, where the median house sells for $1.3 million, a supersized limit seems to make sense.
Even the regular loan limit, which applies in St. Louis and most of the country, is well above what most people would consider a middle-class home. For Fannie Mae and Freddie Mac this year, the regular limit is $647,200. With 20% down, that buys a $809,000 house, which is in the top 7% of houses nationwide. (It’s also more than triple the St. Louis area’s median price, which was $222,000 in November.)
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In both expensive and moderate-cost cities, federal policy creates a feedback loop that keeps prices spiraling higher. Government guarantees allow people to borrow more, which pushes prices up and works against the agencies’ original goal of promoting affordability.
“The people who are hurt are the first-time buyers trying to get on that first rung of the ladder,” said Edward Pinto, director of the housing center at the conservative American Enterprise Institute. “It is a wealth transfer to people who already own homes.”
In his office, Pinto has an FHA poster from 1935, a year after the agency was established as part of Franklin Roosevelt’s New Deal. The poster shows a one-story dwelling of about 1,100 square feet, a typical example of housing the FHA was set up to finance.
Today’s first-time buyer might want something a bit larger, but Pinto says that over the past decade, the low-priced end of the housing market has seen the greatest price escalation. “The affordability problem gets worse and worse,” he said, “and the only answer seems to be to encourage more leverage.”
Private “jumbo” loans are available for houses above the government limits, but they come with stricter terms — a higher down payment or lower debt-to-income ratio, for example. Private loans are the norm in other developed nations with comparable rates of homeownership, but in the U.S. the government backs three-fourths of all mortgages.
Fannie and Freddie once were private companies. Their implicit government guarantee turned explicit when they failed in 2008 and were taken over by the government.
Thirteen years later, they’re still wards of the state. No one in Congress or the White House set out to design the system we have now, but no one’s willing to take on the housing lobby to reform it either.
One solution would be to freeze or gradually reduce the conforming loan limits instead of raising them automatically every year. Private lenders could handle the market for million-dollar mortgages, the feedback loop would be broken and the government could return to its original goal of helping people of modest means afford modest houses.