As policymakers wrestle with the challenge of jumpstarting the economy and creating jobs, they should be aware of what not to do.
High on the list of "don'ts" is to cut off access to mortgage loans supported by Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA). These loans have been a crucial gateway into homeownership for first-time buyers and the middle class, and an important crutch for the still-ailing housing market.
Yet cutting off these loans is precisely what could happen on October 1, when the number of potential homebuyers eligible for government-backed mortgage loans will drop significantly in more than 600 counties across the nation—including in hundreds of struggling and mid-priced areas. In a new PPI policy brief, Another Kick in the Teeth: Loan Limits and the Housing Market, Jason Gold and Anne Kim spell out the consequences of what would happen if the federal government allows the loan limits to expire. Among their conclusions:
- Potential homebuyers suddenly ineligible for government-supported loans will face higher interest rates and much larger down payment requirements. This would be a particular blow for first-time homebuyers, who are already facing obstacles to homeownership.
- Fewer buyers means less demand and even lower home prices, which means more lost equity for current homeowners and spiraling consumer confidence.
- A failing housing market will further dampen prospects for a speedy economic recovery.
Housing and its related industries currently account for 17 percent to 18 percent of the U.S. economy, and a true recovery isn't possible without a strong housing sector. The report argues that by taking the simple step of extending the current limits for government-supported mortgage loans, policymakers can prevent yet another blow to the economy.
As always, your thoughts and feedback are welcome.
The Progressive Policy Institute