Arthur F. Burns Fellow Peter J. Wallison

It's no secret that I am not a fan of Fannie Mae and Freddie Mac. I believe that they are an unnecessary government intrusion into the private financial markets. But I believe I'm consistent in my views. I would also oppose a government program that sought to find homes for people who, for one reason or another, did not have access to the services of real estate brokers at an affordable price.

The reason we don't need a government role in real estate brokerage is that there is no market failure. Real estate brokerage is a competitive business, and competition has always produced the best services and lowest prices for consumers at any income level. In my view, a market failure has occurred when, for example, the absence of competition causes excessively high prices for a service, or in the rare case when competition does not produce socially desirable results.

Certainly, there is plenty of competition in the residential finance market, so if Fannie and Freddie (the GSESs) are to be justified they must be doing something that is socially desirable but not available through normal competitive market operations. Their supporters argue that they reduce mortgage interest rates below those that competition would produce, making home ownership more accessible for everyone. That would certainly be something socially desirable. However, in a series of studies by Federal Reserve economists over the last few years it was shown fairly conclusively that, if GSEs reduce interest rates at all, the reduction is negligible--not even the quarterpoint everyone had assumed. In other words, the subsidies that these two companies receive through their government backing are not even recaptured in the rates they offer to homebuyers.

For that reason alone, I don't think Fannie and Freddie should exist at all; they produce nothing that the private market couldn't produce on its own. Even if one argues that Fannie and Freddie are useful in the troubled market conditions today, that is not a reason for keeping them around for the 10 years or so between periodic market retrenchments. While waiting for some useful role, they would be doing essentially nothing except creating unnecessary risk for the taxpayers who ultimately back them. Indeed, if home prices continue to fall, many observers believe that one or both the GSEs may become insolvent.

For the sake of argument, however, let's assume that, contrary to the evidence, the GSEs actually deliver some benefits. Where should that benefit go? Most of us would say that the place where their benefits are needed is in helping low and moderate income Americans to buy homes. But if this is true, we would have to conclude that the conforming loan limit--which is now $417,000--is already far 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.

Legislation recently adopted by the House of Representatives would increase the conforming loan limit by 50%, to $625,500 for higher-cost areas across the United States. This is the level in the first year; after that, it grows. 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, assuming a standard down payment, this implies that the actual cost of the home would be about $800,000. Yes, home prices may not be equal across the country, but an income of $190,000 is still in the top 5 percent of all family incomes, so that those who are advocating an increase in the conforming loan limit are really urging government help for what they must believe are the deserving rich.

In one sense, of course, the basis for this proposal is simply to equalize, for people in high cost areas, the advantages--if we assume there are any--that are available to the middle class and the upper middle class in areas of the country where home prices are lower. But this is looking through the wrong end of the telescope. The right question is not how to help well-to-do families get their piece of federal largesse, but how to help families that really need assistance.

Thus, it should be troubling to the conscience that if Fannie and Freddie are providing benefits to well-to-do families, they will have to reduce their support for the less well off. There's just no other way to look at it; their capital is limited, and to the extent that they use it for the rich they are not using it for the poor. So, in my view--again accepting the doubtful proposition that the GSEs provide any benefits to anyone--proposals to increase the conforming loan limit are really proposals to take more of these benefits away from the people who might actually need the help and give it to people who don't. In this light, the question that heads this article answers itself: Of course not.

Peter J. Wallison is the Arthur F. Burns Fellow in Financial Policy Studies at AEI.