No Millionaire Left Behind

Yesterday during his testimony to the Joint Economic Committee, Fed chairman Bernanke proposed that the cap be temporarily lifted on jumbo mortgages from $417,000 to $1 million.

Holy moral hazard! If Congress passed and President Bush signed legislation allowing this, it shows the American people that:

  • Here is a President who has twice vetoed health insurance coverage for children, but has no problem helping the wealthy obtain million dollar plus homes. Bush could sign the bill known as the "No Millionaire Left Behind Act" at a lavish Rose Garden ceremony.
  • Here is a Congress who is only interested in helping the wealthy obtain a lower interest rate to buy homes. Congress is not interested in helping middle to lower middle class people obtain mortgages. A conforming $1million loan would allow you to buy a property for $1.25 million with a 20% down payment of $250,000.

Those of you reading this that reside in the most expensive parts of the country such as New York City, may think Bernanke’s proposal is a good idea. The reality of real estate is that buyers can only pay what they’re able to get financing for. That’s called marking to market. If the government truly cared about affordable housing, they would keep the loan limit low.

The other part of Bernanke’s proposal is that Fannie Mae (FNM) and Freddie Mac (FRE) would securitize these jumbo mortgages and the federal government would guarantee them. This would set a very dangerous precedent and place the entire nation at risk to help the affluent buy a home or vacation property.

Banks used to justifiably complain that Fannie and Freddie had an unfair advantage as their implied government guarantee allows them to obtain financing at a slightly lower rate than their commercial counterparts. Now the free marketeers running the banks want government aid. If I was in charge of the Fed, I’d be proposing that quasi government publicly traded companies such as Fannie, Freddie, (and Sallie Mae) have no place in a free market system.

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