House prices have risen – and the share of mortgages assumed by the government

Getty Images, Bloomberg

Federal regulator increases dollar amount of housing loans eligible for Fannie Mae support

FNMA, -0.86%

and Freddie Mac

HSFC -0.88%

, the two giant companies sponsored by the government.

In 2019, the maximum loan compliant limit will be $ 484,350, announced Tuesday the Federal Housing Finance Agency. This represents an increase of 6.9% over the $ 453,100 maximum set for 2018. The change is based on the rate of change in home prices between the third quarter of 2017 and the third quarter of 2018, as measured by the housing price index of the FHFA.

However, in areas where prices are higher, loan limits are capped at 150% of the $ 484,350 base. This means that Fannie and Freddie will guarantee loans up to $ 726,525 in about 100 higher-cost countries.

Raising the ceiling on loans secured by Fannie and Freddie is a way to lubricate the mortgage market. If banks or other lenders can sell larger mortgages to businesses, it will be easier for them to continue lending. This makes it easier for potential buyers to find generally more favorable financing than other types of mortgages, such as those backed by the Federal Housing Administration.

But it also increases the risk for taxpayers. Fannie and Freddie operate with a reduced capital reserve, following a 2012 congressional directive that was corrected at the end of 2017. The update was due to an agreement reached between FHFA's director, Mel Watt , and the US Treasury while continuing to guarantee between 40% and 50% of new mortgages. This means that, no matter the quarter, one or the other of the companies may have to take the taxpayers' money.

Read also: Fannie Mae turns to taxpayers after $ 6.5 billion loss

Many housing analysts in Washington were watching the FHFA move closely on loan limits this year. Watt's term has expired this year and he will likely be replaced by a person well known to Treasury Secretary Steven Mnuchin. Many insiders in Washington think it will be Joseph Otting, who is currently controller of the currency. Otting worked for Mnuchin at OneWest Bank and it is widely accepted that Mnuchin intends to attempt a permanent fix for Fannie-Freddie as soon as he has a trusted MP at the helm of FHFA.

Related: To free Fannie and Freddie, their regulator can bypass Congress, which does nothing.

Republicans should press for less government weight in the mortgage market, a step that could be taken by reducing the types of loans offered or the ability of borrowers to access the market, analysts said. In turn, Democrats would likely accept lower loan limits, assuming that anyone with the means to buy a house worth nearly $ 1 million would not be able to afford it. will not need as much help from the government.

The loan limits "are the good political leverage to debate," said Ed Golding, currently a member of the Urban Institute, which previously headed the FHA. Golding believes that reducing boundaries is "the best way to reduce the government's footprint" if that's what decision makers want.

While acknowledging that the optics of higher loan limits is uncomfortable, Golding points out that government fingerprints are present throughout the financial system, including with respect to the support of banks that contract – and retain their accounts – jumbo mortgages.

"Loan limits should not be unique, but part of the general debate on housing finance reform," Golding told MarketWatch.

See: The Republicans of the Blue State have subscribed to the 2017 tax cuts. That may have cost them.

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