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House prices increased, as did government participation in mortgages.


Getty Images, Bloomberg

A federal regulator has raised the dollar amount of mortgage loans that qualify for Fannie Mae's endorsement

FNMA, -0.86%

and Freddie Mac

FMCC, -0.88%

, the two gigantic companies sponsored by the government.

In 2019, the maximum loan limit will be $ 484,350, said the Federal Housing Finance Agency on Tuesday. That's an increase of 6.9% from the 2018 peak of $ 453,100. The change is based on the rate of change in housing prices between the third quarter of 2017 and the third quarter of 2018, as measured by the Housing Price Index of the FHFA.

But in areas of higher price, the limits of the loans are limited to 150% of the reference $ 484,350. That means that Fannie and Freddie will guarantee loans of up to $ 726,525 in approximately 100 counties with higher costs.

Raising the dollar limit on loans backed by Fannie and Freddie is a way to lubricate the mortgage market. If banks or other lenders can sell larger mortgages to companies, that makes it easier for them to continue lending. In turn, this makes it easier for potential buyers to find financing that is generally more advantageous than other types of mortgages, such as those supported by the Federal Housing Administration.

But it also increases the risk for taxpayers. Fannie and Freddie operate with only a small capital reserve, as a result of a 2012 congressional directive that was amended at the end of 2017. The update was due to an agreement between the FHFA Director, Mel Watt, and the Treasury of I know. UU., Even as they continue to guarantee Between 40% and 50% of new mortgages. That means that in any given quarter, any of the companies runs the risk of having to take money from taxpayers.

Read also: Fannie Mae will appeal to taxpayers after a loss of $ 6.5 billion

Many housing analysts in Washington closely watched the movement of the FHFA over the limits of loans this year. Watt's term ended this year and will likely be replaced by someone known to Treasury Secretary Steven Mnuchin. Many connoisseurs of Washington believe that it will be Joseph Otting, who currently serves as controller of the currency. Otting worked for Mnuchin at OneWest Bank, and it is widely believed that Mnuchin attempts to attempt a permanent Fannie-Freddie solution once he has a trusted officer like FHFA.

Related: To free Fannie and Freddie, their regulator can circumvent Congress to do nothing.

In any revision, Republicans are expected to push for the government to have a smaller footprint in the mortgage market, a step that could be achieved by reducing the types of loans offered or the ability of borrowers to access the market, they said. the analysts. In turn, Democrats are likely to accept lower loan limits, with the premise that anyone who has the means to buy a house worth nearly a million dollars may not need as much government assistance.

The limits of the loans "are the appropriate political lever to debate," said Ed Golding, currently a member of the Urban Institute, who previously served as head of the FHA. Golding believes that lowering the limits is "the cleanest way to reduce the government's footprint" if that is what policy makers want.

Although Golding recognizes that the optics of the higher limits of the loans is uncomfortable, he points out that the government's fingerprints are in the entire financial system, even in supporting the banks that make (and keep in their books) gigantic mortgages.

"Loan limits are something that should not be exceptional, but part of the general discussion about housing finance reform," Golding told MarketWatch.

Watch: Republicans from the blue state embraced the 2017 tax cuts. It may have cost them.

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