A NYT article discussed the impact of the temporary increase of the ceilings for the mortgages that Fannie Mae and Freddie Mac can purchase in areas with high-priced homes. Until the end of the year, the new ceiling in these areas will be as high as $729,750. The article reports that this should help limit the rate of price decline in some areas in high-priced homes. It is actually not clear how much effect the change will have for two reasons. First, the law as it is written is time-limited. If the ability of these institutions really would in principle have a large effect on the price, then home buyers should be reluctant to pay much more for a home if they believe that the higher caps are temporary. These buyers would realize that they would be selling their home in an environment in which it will be above the caps in place at the time, and therefore would command a lower price. In that case, potential home buyers would adjust their offers accordingly. The second reason that this temporary increase in the ceiling may not have much effect on prices is that both Fannie Mae and Freddie Mac have a limited amount of capital. If they spend more money buying high-priced mortgages, then they will have less money to buy lower priced houses. This will be especially true if Fannie and Freddie rush to buy mortgages in markets with rapidly falling house prices. In this case, they would see high default rates on the new mortgages and could soon be seriously constrained in their ability to buy up new mortgages.
--Dean Baker
