Why Mortgage Caps do More Harm Than Good

FBN's Gerri Willis on the good and bad news of plans to lower mortgage caps.

This article is part of the series

Mortgage Caps Do More Harm Than Good

By Columns FOXBusiness

There seems to be nothing but bad news when it comes to the housing sector. Today it's a little of both good and bad news.

The good news is the government is slowly getting out of the mortgage business. Right now government housing companies Fannie Mae, Freddie Mac and the Federal Housing Administration back more than 90% of new mortgages in this country.

That's thanks to $138 billion of your taxpayer money. For the last few years, anyone wanting to get a home loan for less $730,000 could go through the federal agencies. These caps were put in place after the mortgage meltdown to get the market moving again

But starting October 1, that will all change. In some of the biggest cities - where home prices are typically higher than the national average - the cap will be lowered to around $625,000. In more rural areas that number could be as low as $271,000.

That's a huge difference and could really impact homebuyers of all shapes and sizes. The change will not be universal - it will be in about 600 counties to start.

However the National Association of Homebuilders says those counties represent more than half of the nation's housing stock. Just to put this in perspective: according to the Wall Street Journal, if these limits had been in place last year, Fannie and Freddie would have backed 50,000 fewer loans.

That's a lot of taxpayer dough!

So again, the good news is by scaling back these limits, more private sector lenders will be able to get in the game. However, here's the bad news: if you are looking at a home above these caps, and let's face it, especially in places like New York City, it's not hard to do. You will be forced into jumbo loans.

Jumbo loans bring higher interest rates and larger down-payment requirements. According to HSH Associates, jumbo interest rates are above 5%, and government-backed loans have a 4.6% rate.

Here's an example of who this hurts: A wine-maker in Sonoma County is rushing to close on a sale of a $662,000 home - a loan currently backed by the FHA. But if he doesn't get the keys by the fall, the FHA cap falls to $521,000 and he's out of luck.

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It's not that he can't afford the home. He's currently going through a divorce and doesn't have immediate access to the 20% down payment private lenders require.

The FHA lets him buy the home with only 3.5% down. Nobody wants the government to butt out of private business more than me.

But dumping the problem solely on the banks isn't the solution either. This housing market needs a shot in the arm to reverse the slide it's on. Making it harder for Americans to own homes could make a bad situation worse.

Be sure to catch the Willis Report on the FOX Business Network every weekday from 5-6pm ET.

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