Shotgun stimulus plan: nothing new for housing

If you're reading this blog chances are your livelihood depends on housing in some way. If so, President Bush's $150 billion economic stimulus package may seem like a shotgun approach that doesn't "speak to you" directly.

The plan envisions $100 billion in tax incentives and tax breaks targeted at individuals -- including possible tax rebates of $800 to $1,600 per family. The idea is to boost consumer spending, but what is $800 or $1,600 going to do for the 1.8 million people with ARM loans facing resets this year and next? Give them another month? The administration thinks its FHASecure loan guarantee program and HOPE NOW alliance with loan servicers can help many of those people, and is proposing no new initiatives targeted at housing.

But Congress will also have a say in the plan. Yesterday, the National Association of Realtors put out a press release saying that any stimulus package must include an increase in the $417,000 conforming loan limit. Raising the conforming loan limit to $625,000 would help prop up home prices by 2 to 3 percentage points and keep 140,000 to 210,000 homes out of foreclosure, the group claimed.

But raising the conforming loan limit might also be risky, and create some undesirable side effects. A report out this week from Fannie and Freddie's regulator, OFHEO, concluded that an increase in the conforming loan limit could lower interest rates some borrowers pay on jumbo loans. But those benefits might be short-lived, if the secondary market for mortgage-backed securities backed by non-conforming loans gets its legs back.

The secondary market shows no such signs of getting its legs back. But letting Fannie and Freddie venture into new territory might lead them to back more risky loans, and also use up capital they could otherwise use to fund a larger number of smaller loans, OFHEO said. Of course, these are the same folks pushing for a DECREASE in the conforming loan limit next year in line with falling home prices.

The Bush administration continues to insist that Congress must pass legislation strengthening oversight of Fannie Mae and Freddie Mac ("the GSEs" or government sponsored enterprises) before it will go along with an increase to the conforming loan limit.

They might have a point there. A GSE reform bill has been on lawmakers' agenda for years. The House passed its latest GSE reform bill months ago, but the issue is bogged down in the Senate again. Just remember that when the finger pointing intensifies. Congress could have dealt with many of these issues before they become emergencies.

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