With home sales and prices dropping at record rates, economists say the most potent cure for the economy in the stimulus package is a provision lifting the limits on Fannie Mae and Freddie Mac so they can buy jumbo housing loans up to $729,000.
The mortgage relief could help staunch the hemorrhaging in high-priced housing markets like the Washington area, California and New York, where buyers have had difficulty getting loans and are paying interest rates a full percentage point higher than the 5.5 percent average rate on smaller loans backed by the government enterprises, according to BankRate.com.
Analysts say the boost to the economy from the mortgage provisions ultimately could exceed the lift from the package’s $150 billion of tax cuts and rebates by contributing to a major refinancing boom that began with a steep drop in interest rates this year. The cash-out refinancings are putting tens of billions of extra dollars into consumers’ pocketbooks.
“It could do a lot to unfreeze the mortgage market,” said John Rutledge, an economic consultant and former Reagan economic adviser, calling the increases in conforming loan limits from the current $417,000 to as much as $729,000 in high-priced areas “the most powerful medicine in the package.”
The housing market has plummeted since August when buyers started having difficulty getting jumbo loans and other “nonconforming” mortgages without the standard terms that enable them to be purchased by Fannie Mae and Freddie Mac. The two enterprises constitute the primary market for about 70 percent of new mortgage loans.
The credit contraction caused new home sales to plunge by 41 percent in the year through December while prices dropped by 10 percent in the worst performance since the deep housing recessions in 1971 and 1980 — with the losses accelerating at record speeds at the end of the year, the Census Bureau reported yesterday.
Despite the struggles facing home buyers, Congress and the Bush administration for months failed to act on proposals to remove the restrictions on Fannie and Freddie because of long-standing differences over separate legislation establishing a tough new regulator over them. The White House had refused to sign a bill raising the limits without the new oversight provisions.
But as the housing and financial markets imploded in recent weeks and threatened to engulf the entire economy, the White House acceded to the demands of House negotiators to raise the limits for one year in the stimulus package, with the proviso that Congress — and the Senate banking committee in particular — commit to passing an oversight bill this year.
Sen. Christopher J. Dodd, Connecticut Democrat and chairman of the Banking, Housing and Urban Affairs Committee, vowed Friday to keep his end of the bargain.
Mr. Rutledge said the provision will make jumbo loans cheaper for buyers and more marketable to investors, but its benefit could be limited because the increase is only temporary.
“Investors want to invest in a stream of loans, not one-time packages,” he said. But he added that the White House has assured him that the agency-backed jumbo mortgages will enjoy the same benefits as other conforming loans.
David Wyss, chief economist with Standard & Poor’s, said the provision should help bring the rates on jumbo loans closer to a “normal” level about a quarter-percentage point above 30-year conforming mortgages, where they were before the credit crisis hit in August.
“The help is most needed in high-priced markets, such as Los Angeles, San Francisco and New York,” he said.
Richard Berner, chief economist at Morgan Stanley, said the jumbo provision should magnify the impact of what’s shaping up to be a major refinancing boom this year. Because about 20 percent of all outstanding mortgages are jumbo loans, he expects the savings for consumers with jumbo loans to exceed the record $31 billion they enjoyed during the 2003 refinancing wave.
“In today’s circumstances, the relief could be most welcome,” he said. Still, he does not expect the stimulus measures, even when combined with the dramatic interest-rate cuts the Federal Reserve has carried out recently, to prevent the economy from suffering a mild recession this year.
Todd McCracken, president of the National Small Business Association, said small-business owners are excited about the jumbo-loan increases, because many entrepreneurs finance their businesses using second mortgages and home-equity loans. He noted that the benefits of the provision, unlike the tax cuts, come at no cost to the government.
“Interestingly, the one piece of this proposal that won’t reduce federal revenues is also a piece that stands to benefit startup small businesses the most through lower interest rates and greater availability of loans,” he said.
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