The Senate Moves to Subsidize Homes for the Rich

Just when we thought the conforming limit would finally decline, the Senate disappoints us

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Anyone who hoped that we would begin to see how the mortgage market might function with a tiny bit less government support should be pretty disappointed today. The Senate approved a measure that would reinstate the high-cost mortgage limits that expired on September 30th. The move seeks to ensure that relatively affluent Americans will get slightly cheaper mortgages, while keeping the training wheels on the housing finance market.

For anyone who hasn't been following along, here's a detailed explanation. For a quick refresher, the government agreed to back bigger mortgages in 2008 when the credit markets froze up. At that time through September of this year, the mortgage limit was 125% of the metro area's median home price in 2007 or $729,750, whichever was smaller. Prior to this jump, the limit was set at just $417,000. As of this month, that limit declined to 115% of the metro area's median home price in 2010 or $625,500, whichever is smaller.

You can see that this policy is specifically geared towards relatively expensive mortgages. It isn't meant to lend a helping hand to Americans on the cusp of home ownership. It isn't even meant to assist the average homeowner, who will have an income above the metro area's average. In any city, those who raising the limit would benefit will be relatively affluent. The old limits should be allowed to expire.

As I wrote a few weeks ago, the expiration of the limit came and went, but the change didn't disrupt the housing market. Experts said that it wouldn't have a big impact: banks would continue to finance these jumbo mortgages without government support. They might just be a little more expensive. Of course, if you're getting a mortgage for $700,000, then you can probably afford a couple more basis points on your mortgage interest rate.

But today, the Senate passed an amendment to a minibus spending bill that would extend the old, higher mortgage limits. It passed 60 to 38. Just eight Republicans voted in favor, while no Democrats voted against it.

Now the spending bill will go back to the House. The more right-leaning chamber rejected the conforming spending limit extension earlier this year. But since it's attached to a broader bill, its chances of passing might be stronger this time around. Besides, some Republicans support a continued aggressive role for the government in the housing market. Two Republicans have sponsored bills that would largely maintain its role as guarantor of the mortgage market.

If the conforming limit extension does pass the House, it would also need President Obama's signature. Although the Treasury has released a housing finance policy white paper that suggest conforming limits should be allowed to slowly decline, without a line-item veto, the president might sign the bill in order to secure the spending it contains.

So we'll have to wait and see how this turns out, but we may see these limits reinstated after all. This demonstrates the tremendous power of the real estate lobby. It also shows the grim fate of housing finance policy reform: if Congress isn't even willing to cut the government's guarantee for relatively rich people, then broader reform is doomed. But on the bright side, the mortgage for that McMansion you have your eye on could be a little cheaper later this year.

Image Credit: Reuters