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Housing Bailout Masquerades as Stimulus

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Fannie and Freddie asked to save the mortgage market.

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The only viable long term solution for the mortgage problem is to allow prices to return to levels that are affordable in a traditional lending environment. But, in the interim, Washington may have succeeded in buying itself some time by increasing loan limits for Fannie Mae (FNM) and Freddie Mac (FRE).

Only the most Pollyannaish would argue that mailing checks to the spending vacuum that is the American consumer is an effective way to bolster the economy, so the true motivation for the unusually quick congressional action is for Fannie and Freddie to step in and support housing values.

The implicit government guarantee these companies carry has allowed them to be the sole source of liquidity since the secondary market for mortgages seized up last summer. However, even though Fannie and Freddie control the market for prime mortgages, they are unable to buy loans with a face value greater than $417,000.

High home prices and a stalled jumbo loan market mean potential buyers in areas with the fastest home price depreciation like California, Arizona, Nevada and Florida can barely find a loan. Combined with rampant speculation and exotic mortgages, illiquidity in the market for big loans has exacerbated the home price decline.

Even if expanding the reach of these institutions does jumpstart the market, its effects may not be as far-reaching as regulators hope. Fannie and Freddie's underwriting guidelines are tighter than most private lenders, so borrowers must have good credit and post sizable down payments to qualify.

At best, Congress's ruse will provide fodder for the November election as each party stakes its claim as savior of the American economy. At worst, by delaying the inevitable Washington has increased the severity of the eventual day of reckoning.
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