The government has finally acted to address the increasingly bloody residential real estate markets.
In a plan that includes a refund check to taxpayers, the government also agreed to lift the loan limit that Freddie Mac and Fannie Mae can purchase, which basically has the effect of lowering interest rates for loans above the previous cap of $419k up to the new cap which approaches $700k.
There is a catch: this does not apply to evenly across the board. In a sick twist that will have the effect of basically giving a government guarantee to help prop up those with more wealth in real estate, the loan caps are only lifted for communities where the average house price is greater than the previous cap.
The details are discussed in this article:
The article suggests rightly that the markets feeling the most pain in the crash are are those in California and elsewhere where the median home does not currently qualify for federal mortgages.
However, the value of these homes also represents the relative wealth in these communities. Sure they are getting hurt now, but they also likely had a greater rate of appreciation in the bubble. They benefited from the excesses of Wall Street originated mortgages, but rather than letting the market correct these excesses with a reversion in prices, the Government is basically using taxpayer dollars (in the form of an implicit backstop for Freddie and Frannie) to bail out these overpriced assets.
Perhaps I am being a bit harsh, but a more equitable solution would have been to increase the cap across the board so that communities that have not yet realized the “American Dream” of ridiculous home values could have any chance to compete with the inflated values seen in the markets that will benefit from this rule.
Or better yet, the government could leave its too-late overly-simplified solutions on the sidelines until it came up with a more comprehensive rescue package like one suggested by Bank of America this week which envisioned the government buying mortgages and renegotiating with current occupants to prevent unnecessary foreclosures and wasted resources. Such direct social service seems to better represent the role of government in trying times like this rather than trying to play master of a market that is badly broken and clearly deeply misunderstood by most.