To the Editor:
A story on May 17, "Loan-Limit Reform on Hold Pending Larger GSE Debate" [page 12], chronicled the efforts of the California Association of Realtors to promote legislation to raise the conforming-loan ceiling in high-cost areas of California and other states to from $275,000 to $412,500, the present statutory limit in Hawaii and Alaska.
California Realtors have support in other high-cost states, and the National Association of Realtors supports the proposal as well. The thrift industry has worked hand in hand with Realtors in California, New York, and nationally to promote policies that ensure the best possible housing and housing finance to all Americans.
We have cooperated on many issues over the years, but we part company on this one. America has many housing problems, but we ought to be able to cross off the list any perceived needs of the ill-housed wealthy. It is low-, moderate-, and middle-income citizens who have a problem finding adequate housing. Subsidizing the wealthy is not good public policy.
There is an implication in the argument made in support of higher ceilings that persons seeking loans in excess of the present ceiling are experiencing difficulty finding mortgages. This is simply not the case. Those fortunate enough to afford housing in these price ranges can easily get financing. A visit to a mortgage Web site would elicit competitive quotes from dozens of lenders. They may not get a 25-basis-point rate subsidy, but why should they? To afford a home that requires $412,000 in mortgage financing, a borrower would need an income approaching $200,000.
According to the article, the argument in favor of a high-cost exemption is that prices in some parts of the country, like San Francisco or Westchester County in New York, have gone up more than prices in Alaska and Hawaii. Therefore, the lower 48 states should be granted the same high-cost exemption that was provided to those states in the 1970s.
But there was no provision for annual increases in the conforming ceiling when these exceptions were enacted, and construction costs were demonstrably higher in Alaska and Hawaii at that time. Now the ceiling is indexed and adjusts annually. It has gone up by nearly $25,000 per year for the past two years.
If anything, the present ceiling should be frozen, so that GSE subsidies can be directed where they are needed most. Four mortgages of $100,000 could be subsidized for what it costs to subsidize one $400,000 loan.
Agency mortgage programs have never been means-tested, and while the agencies obviously know, they have never disclosed the incomes of their borrowers. It is likely that a large number of very rich people receive the subsidy, but only the GSEs know for sure.
According to the May 23 testimony of Dan Crippen, director of the Congressional Budget Office, the average loan-to-value ratio on loans purchased or securitized by Fannie Mae is about 71%. (Freddie Mac's is 73%.) To put it another way, about half the borrowers who receive GSE subsidies have equities in their homes of 30% or higher.
While this does not mean that half of the GSE-aided borrowers around the country are affluent, it strongly suggests that many of them are. This is hardly the image the agencies project in running advertisements in major newspapers and on television, ads that generally picture young first-time home buyers able to realize the American dream thanks to the GSEs.
There is a deeper concern shared by many well-capitalized and highly efficient companies that provide mortgage and settlement services. According to the recently released "CBO Analysis of Federal Subsidies and the GSEs," the agencies now finance 71% or some $2 trillion of a total of $2.8 trillion in conforming mortgage debt outstanding. To put this in perspective, the entire jumbo market is under $1 trillion.
If the ceiling were to be increased in high cost areas to $412,500, it is reasonable to assume that about 71% of the newly eligible mortgages would go to one agency or the other. In the short run, a great many very affluent borrowers would see a reduction in their mortgage rates. In the long run, however, there would inevitably be less competition in the mortgage market as more and more private-sector lenders abandoned it.
There is genuine fear that the entire mortgage market could be federalized. The agencies have overwhelming financial power, largely because of the subsidies their charters provide, as just documented by the CBO. Their power is such that when they enter a market, they can drive out even the most efficient private-sector firms.
We hope Realtors will reconsider their position on higher ceilings. It may not be in their long-term interest to expand, even further, the GSE role in mortgage finance.
Realtors rightly complain when the GSEs bypass their industry by directly selling homes they acquire through foreclosure. Realtors would be understandably livid if Fannie or Freddie were to offer their services, selling properties acquired by our members through foreclosure for lower fees and commissions than Realtors can offer because of the financial advantages the GSEs have. This is the position mortgage lenders would be in if the GSEs were permitted to enter what is now the jumbo market in a very significant way.
Of course housing prices and incomes generally vary greatly around the country. There are housing markets where moderate and middle-income families cannot find any affordable housing. This continues to be a national problem crying out for a solution. But a 25-basis-point subsidy will not put a two-wage-earner family making a total of $80,000 per year into a $450,000 house.
Federal housing subsidies, no matter how delivered, should be aimed lower, not higher.
Community Bankers Association of New York State
Western League of Savings Institutions