Hey, who wants to make a bet that Fannie Mae and Freddie Mac will be able to back jumbo mortgages before the end of 2008? It is a tempting wager, I admit, but you could lose your money on this bet without pondering a few considerations.
Last year's fraying of the jumbo market caught many industry experts by surprise. Then again, these same people kept insisting that subprime's woes were contained and would not damage the industry as a whole. Nonetheless, jumbo mortgages are particularly vulnerable because of their higher interest rates and the fact Fannie and Freddie cannot touch loans greater than $417,000.
However, the White House is actively pushing for legislation to allow the government-sponsored enterprises (GSEs) to handle jumbo. Treasury Secretary Henry M. Paulson Jr. has been talking up the subject since December, and White House counselor Ed Gillespie has also been speaking to reporters about why that's a great idea.
How high can Fannie and Freddie go? Federal Reserve Chairman Ben S. Bernanke is on record suggesting Fannie and Freddie should be able to buy mortgages up to $1 million.
But there are three problems that might disrupt this plan. The first is the plan itself: It is only a short-term idea to strengthen the housing market and stimulate the economy away from the realm of recession. Paulson made it clear in a recent speech that it would be ‘bad public policy’ to permanently erase Fannie and Freddie's limits relating to jumbos.
At face value, it makes sense – the economy is not getting healthier, and this plan could be the economic equivalent of a multi-vitamin shot. But the White House is vague on the notion of how long this will last. Is this a six-month solution? A one-year solution? We can't say the devil is in the details because there are no details at the moment.
The second problem is the decided lack of congressional enthusiasm over this plan. Congress, not the White House or the Fed, has the sole authority to reset Fannie and Freddie's limits. To date, there is no evidence of any growing groundswell in the House or Senate to support this plan.
Even worse, the stalled Congressional action on mortgage reforms is only now getting back to speed thanks to the return of Chris Dodd, D-Conn., to the leadership of the Senate Banking Chairman following his extended absence in his doomed presidential campaign. Don't expect a rush for reform anytime soon.
Also, consider the current animosity between the legislative and executive branches of the federal government, not to mention the fractured schematics of both congressional chambers. The notion of common ground solutions in Washington seems shaky – especially in an election year, when politicians would rather exploit the mortgage industry than work to help it.
The third problem involves Fannie and Freddie themselves. If they do a good job in backing jumbos on a short-term basis, it is easy to imagine they'd push to keep the setting permanent rather than temporary. And that, of course, cancels the whole point of the proposal.
My take on the issue: Fannie and Freddie will put up a spirited fight to get their hands on jumbos, but it will be in vain. The Democratic leadership in Congress will block the effort because they will consider it as an attempt for the White House to pass along a legislative agenda that will outlast the current Oval Office occupant's term in office.
And there is also a wild card scenario that I am betting on: The jumbo market will stabilize on its own, without outside assistance from Fannie and Freddie. Thanks to increased due diligence and risk mitigation on the part of originators, investors could easily see jumbo mortgages as worthy of their attention. Which, I believe, will represent the ultimate win-win situation: a market healing itself without governmental interference.
– Phil Hall, editor, Secondary Marketing Executive
(Please address all comments regarding this opinion column to hallp@sme-online.com)
