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Reduced federal loan limit could sink housing prices

October 10, 2011 03:16PM

In its bid to reduce taxpayers’ $141 billion exposure to housing mortgage risk and spur private investment in the sector, Fannie Mae, Freddie Mac and the Federal Housing Administration stopped backing jumbo housing loans. According to the Wall Street Journal, that move could put the housing market, and specifically housing prices, in a further funk.

The three entities backed about 90 percent of home mortgages in recent months, thanks to the expanded loan limits. But the limits were restricted this month, meaning more buyers will have to turn to private banks to secure mortgages. Those loans are harder, and more expensive, to obtain. Banks would need to issue 56 percent more jumbo mortgages to fill the gap.

While proponents of the change argue that the people taking out jumbo loans on pricier homes don’t need federal support, opponents say sellers will be surprised to find fewer potential buyers interested in their properties. As a result, home prices could sink even lower and further damage the sputtering economy, the Journal said. [WSJ]