conforming mortgages

If there were any sense to it, the loan limits would vary based on the geographical region where the home is located, and would be indexed to cost of living in the area. The current system amounts to a subsidy of homeowners in areas with low home prices, irrespective of their incomes and relative wealth (relative to neighbors). Even below-median income earners in high-cost areas end up in the jumbo market, and pay the higher interest rates associated with those loans. Meanwhile high income earners in states like, say, Mississippi or Michigan benefit from conforming mortgage rates, because home prices are so much lower. $720k with $300k down buys a 2BR condo in SF, or the governor's mansion elsewhere.

The whole scheme is questionable though, anyway. Between the "implied guarantee" for conforming mortgages and the mortgage interest deduction, there's a huge subsidy for homeowners, that largely benefits higher-income taxpayers. I don't see either changing and it acts as an incentive to buy a larger home.

-Tad

I don't follow that logic. FNMA is packaging loans for resale, thus providing some greater level of liquidity than would exist otherwise. The fact that people are getting a loan at a lower interest rate doesn't strike me as a subsidy. Subsidy usually implies a transfer of wealth, that doesn't seem to be the case here. JOE

Joe (& Elle) - I'm speaking of "subsidy" as used in economics. I was just looking for a good explanation of this and the top google hit is pretty good - the wikipedia page - it even has a section on this specific subsidy, and no I didn't just add it to prove a point!:

I recently downloaded the 7/31 Case-Shiller home price index data into Excel and the area that is absolutely hammered right now is...Detroit, with Cleveland not far behind. It seems possible the majority of the housing stock of Detroit is underwater. Based on the index you have to go back 7 years to find prices that leave today's seller at break-even, factoring in a 5% transaction cost. The average buyer who bought in the past 10 years and borrowed any significant amount of money out on a HELOC looks to be underwater. Given the median prices there it seems likely that almost all of those homes are covered by conforming mortgages.

So from a risk perspective, the GSEs are arguably more out on a limb buying $125,000 mortgages in Detroit, than they would have been with $750k mortgages in SF. If tax dollars go to bailing out the GSE portfolios their imminent death might not be from big slashes in CA, NY or MA, but rather from 1000 tiny cuts in the rust-belt, Southeast, and Southwest.

-Tad

"TB" wrote

So am I. The wiki definition is the usual one. Nor does the wiki article make any claim that the geographic differences in cost of living for the conforming mortgage result in a "subsidy."

Social Security, for one, is not indexed by geographic location, either. I am sure there are other forms of government assistance (or non-assistance) and regulation that result in the same "disparity" to which you object. But we don't call the geographic differences "subsidies," unless we are arguing for some sort of odd leveling that, in turn, is also a subsidy for those choosing to live in the more expensive parts of the country. This would be a subsidy, too, and one whose fairness is as debatable as anything else in this thread.

There are a number of places in this country where federal employees receive a non-taxable cost of living adjustment. Washington, DC, Hawaii, and Alaska are 3 locales that I know about; I believe there are others. In the case of DC this is a 25% COLA. And remember, I said non-taxable! Wouldn't you call that a subsidy?

Elizabeth Richardson

"Elizabeth Richardson" wrote

Of course, Elizabeth. My post does not assert what you mistakedly (post-o for you?) inferred.

I think Tad's poor (IMO) choice of wording led to opening a can of worms. By his reasoning, there is one heckuva lot in the markets that could be called a "subsidy," due to government presence or abscence.

What part of the first quote above doesn't refer to geographic differences not being called subsidies? No, kitten kaboodle wasn't a post-o, just an error. My post was neither an error nor a post-o.

Elizabeth Richardson