Mortgages: How Involved Should the Government Really Be?
The loan limit for a mortgage is about to jump in 2022. For the first time, government-sponsored entities Fannie Mae and Freddie Mac will back mortgages as high as $1 million dollars in high-cost housing markets and about $650,000 in most other jurisdictions.
These loan-limit adjustments come in response to the rising prices of homes over the past year. Home prices are rising due to the shortage of homes, low interest rates on mortgages, and changing needs of buyers during the pandemic. Loan limits are adjusted annually by the Federal Housing Finance Agency to account for a variety of factors that affect home prices on a yearly basis. The rise in loan limits will make it easier for borrowers to buy a home, but it also causes many to question how much government involvement we should have in our economy, specifically in the housing market.
Fannie Mae and Freddie Mac have growing ownership in the mortgage market as they increase the limits of loans they are willing and able to make to borrowers. Their share of the market was 42% in 2019 and now it is up to 60% of all new mortgages. Fannie Mae and Freddie Mac aren’t actually making loans though, they are buying them from lenders and holding them. These firms are assumed to be very reliable, as they are government-created and supported agencies by the Treasury Department.
Those arguing that Fannie Mae and Freddie Mac are playing too large of a role in the housing market say that home-buyers who can afford a $1 million dollar mortgage should be able to afford a home without financial support from government-sponsored entities like Fannie Mae and Freddie Mac. Instead, we should be trying to encourage the mortgage market to move toward utilizing non-government backed firms, so less market share is held by the government. On the other hand, since the rise in loan limits helps those in costly home markets, we would be hurting those who are in locations where home prices are extremely high, such as in California or New York.
How Fannie Mae and Freddie Mac continue to operate will have important implications on the future of the mortgage market. If trends continue and these entities continue to increase loan limits along with the rising costs of homes, we will be posed with the question of whether this much government ownership is something that helps people or prevents the private mortgage market from developing. Either direction will affect the way people in the U.S. see government intervention in financial markets and our economy.
