We come from different political backgrounds and differ on the merits of government-sponsored enterprises, but we are in complete agreement that the government should not be subsidizing housing for the wealthiest in our society.

Yet that would be the result of a provision in the GSE reform bill passed by the House this past fall. It would raise the “conforming loan” limit for Fannie Mae and Freddie Mac by a whopping 50% and thereby increase the access of wealthy homebuyers to a government subsidy that Congress intended to benefit families with low and moderate incomes.

So far, the Senate has rightly balked at including this provision in its own bill.

To help ensure that the subsidy accorded Fannie and Freddie was used only for those who need it, Congress established limits--called “conforming loan limits”--on the amount of a mortgage that Fannie or Freddie could deal in. Under existing law, the limit has risen to $417,000.

This is already too high. To qualify for a $417,000 mortgage, a family would have to earn at least $130,000--more than twice the median family income in this country, and hardly a low or moderate income.

The House bill, however, would increase the conforming loan limit by 50%, to $625,500, for higher-cost areas across the entire United States. To qualify for a mortgage of that size, a family’s income would have to be $190,000, almost three times the national median, and in the top 5% of all family incomes. And such an increase would probably mean, assuming a standard down payment, that the actual cost of the home would be about $800,000.

Let’s be clear about what this means. To the extent that Fannie and Freddie make loans to these wealthy families for high-cost homes, they are not making loans to the families of low and moderate income that Congress intended to benefit.

The GSEs and some special interests that benefit from government subsidies for housing are now trying to convince the Senate to adopt the House-passed provision. This would be very bad public policy--not just extending a subsidy to those who don’t need it, but depriving those who do need help of whatever benefits the GSEs confer.

In any event, the GSEs’ record in providing assistance for homebuyers of low and moderate income has not been good. The Department of Housing and Urban Development has long had regulations intended to focus Fannie and Freddie on low-income or affordable housing. HUD secretaries have set goals, but these have had little effect in helping ensure the GSEs meet the housing needs of the underserved.

In an April 2002 report, HUD found that the GSEs “continued to underperform the conventional conforming market in funding affordable home purchase loans for borrowers and neighborhoods targeted by the housing goals.” It also found that “their market share for each of the affordable lending categories is less than their share of the overall market; and they account for a very small share of the market for important groups such as minority first-time homebuyers.”

In other words, despite their significant subsidy--about $20 billion, according to a 2004 Congressional Budget Office study--the GSEs were doing less than conventional lenders in helping the underserved. The HUD data was striking: GSE purchases were about 46% to 48% of all home loans originated in metro areas, but only 24% to 29% of loans for African-American and Hispanic borrowers, and about 35% to 37% for low-income borrowers and properties in underserved areas.

Further, a Federal Reserve Board staff study had earlier found that the GSEs, despite their large and growing portfolios and dominance of the conforming market, provided only about 4% of the credit support going to minority borrowers.

Even more troubling, the GSEs have been more interested in looking good than doing good. Recently, both Fannie and Freddie were found to have engaged in “roundtrip” transactions purely to “appear” to meet goals rather than actually funding goal-related loans. They did this by purchasing mortgages from major financial institutions but with agreements containing dissolution options that allowed the seller to take the mortgages back within a very short time.

So, one must ask: Why should the GSEs be allowed to underwrite mortgages of up to $625,500 for homes costing about $800,000? There are many lenders aggressively competing to make the higher-amount loans, and the GSEs are not doing the job they should for low-income homebuyers.

Fannie and Freddie should do a much better job of providing affordable home financing to a neglected portion of the mortgage market. And this certainly doesn’t include someone applying for a $625,500 loan.

Peter J. Wallison is a resident fellow at AEI. John J. Lafalce Peter Canisius Distinguished University Professor at Canisius College and an attorney in the Buffalo office of Harris Beach PLLC.