The ongoing debate now whether to let Freddie and Fannie ("the GSEs") offer government guarantees on so-called "jumbo" loans is a laugh.
What's more, it's crazy: would you sell more flood insurance as the storm was coming in? Raising the 'conforming limits' to combat credit issues is daft, although allowing the GSEs to expand their balance sheets is not.
First, the primary "insurance" that real property lenders have are the favorable bankruptcy laws, which protect them in bankruptcy court. (You could argue they are a protection for the borrower, too, but that seems to miss the subtlety of the issue, when it is the adjustable mortgage itself that is the marginal cause of bankruptcy.) The rest of "insurance" that a lender may force you to buy can, therefore, be conceptualized as an effort to have you partially pay them for their costs to collect in court, if needed ... it's profitable, too.Second, for years, the "free market" folks have attacked the GSE as not adding value and as near to government intrusion. Today, they are being hailed as guardians of the safety and soundness of the system, even, and not living up to their public interest mandate! (You cannot make this stuff up...). Besides, how many sub-prime and "alt-A" jumbo loans should be underwritten, anyway? Shouldn't those be few and far between, not offered backstop?
Last, the FHA was supposed to help people who didn't have access to the credit markets so well get their first home and get on the way to the American dream. Expanding that to $500K+ mortgages is more than "mission creep". What's more, it's crazy: would you sell more flood insurance as the storm was coming in? Raising the 'conforming limits' to combat credit problems is daft, although allowing the GSEs to expand their balance sheets is not.
[btw, despite what you may read, make no mistake that the low rates had an impact on financing and even the originate-to-distribute model that was the source of most of the predatory / lax lending policies, including "no doc" loans - ha! It happened in two ways: (a), because of low rates, people wanted to invest in higher yields and they found them in sub-prime and "alt-A" and; (b), incented providers to borrow (and over-leverage) in the short-term markets, like Countrywide, in order to finance their book of business most profitably rather than most prudently. ]
