Fannie and Freddie

Congress is breaking out its blunt instruments. A stimulus package just passed by the House of Representatives would allow Fannie Mae and Freddie Mac, the government-sponsored re-packagers of mortgages, to buy jumbo mortgage loans valued at up to $729,750 – well above the current $417,000 limit. Such a move would unduly expand the mortgage giants’ reach in exchange for potentially meagre short-term benefits to the housing market. On the face of it, the government’s efforts to boost jumbo loan liquidity are understandable. The spread between interest rates on jumbo loans and smaller loans that conform to Fannie and Freddie’s standards has quadrupled to a full percentage point. Investors’ limited appetite for jumbo loans has dulled the effects of the Federal Reserve’s interest rate cuts. If Fannie and Freddie could buy and securitise those loans, it could stimulate lending in regions where homes are particularly costly. Jan-14