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Taxpayers Beware

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Behind closed doors on Capitol Hill, a massive lobbying effort is underway.  On a seemingly small issue with scant public attention, powerful special interests are looking to cash in their chits and strike a deal – a deal that will come at the expense of taxpayers.

This week, House and Senate conferees will negotiate a minibus appropriations measure.  Many Americans will focus on the inflated levels in spending and wonder how any self-described conservative could vote for a spending increase. The media will focus on the threat of a government shutdown and hope it will spike their rating. However, those powerful interests will focus like a laser on securing an increase in the conforming loan limit.


Don’t stop reading. Conforming loan limits sound boring, but that is by design because boring doesn’t invite scrutiny.  In reality, this stealthy, special interest lobbying effort has major ramifications for America’s housing market and it could be the most significant legislative action this Congress.

An increase in the conforming loan limit would increase taxpayers’ exposure to additional bailouts by allowing the Fannie Mae and Freddie Mac (the GSEs) to purchase and the Federal Housing Administration (FHA) to insure home loans up to $729,750.  As of October 1, the stimulus-era increase ended and the limit dropped to $625,000.  Before the financial crisis, it was $417,000.

In practical terms, it would mean taxpayers would now be on the hook for guaranteeing home loans for as much as $729,750.  If you’re looking to buy a home in that price range, you’re probably a fan of this idea because it would amount to an “upfront subsidy” of more than $123,000 since the down payment is not risk-based, according to the folks at Economics21.  However, as we saw last week when taxpayers shelled out another $6 billion to keep Freddie Mac solvent, there is a serious risk to the taxpayer. 

That is why Republican presidential candidates have mentioned Fannie and Freddie repeatedly.  Even a former Freddie lobbyist is lobbying against the increase.  There is widespread recognition the current housing system is broken, and it cannot be fixed without serious reforms to Fannie and Freddie.  To their credit, House Republicans laid out a strong position in their Pledge to America last fall:

“Since taking over Fannie and Freddie, the mortgage companies that triggered the financial meltdown by giving too many high risk loans to people who couldn’t afford them, taxpayers were billed more than $145 billion to save the two companies. We will reform Fannie and Freddie by ending their government takeover, shrinking their portfolios, and establishing minimum capital standards.”

Now, an array of special interest housing groups, including the National Association of Home Builders and National Association of Realtors, are lobbying those same House Republicans to turn back on their Pledge to America.  And make no mistake, “Big Housing” carries a lot of sway inside the Washington Establishment.  It’s not just the political donations; it’s the relationships crafted over the decades, the revolving door and the ever blurring line between private sector and public sector. 

It is this corrupt nexus between the Washington Establishment and big special interests that have led Americans to vote for change in each of the last three election cycles.  They correctly believed Washington was broken, and the deck was stacked in favor of the big, powerful, well-connected special interests.  Inserting a provision into a bill behind closed doors without public vetting at the behest of Big Housing is exactly the sort of behavior Americans voted against in 2006, 2008 and 2010. 

Caving into Big Housing’s lobbying effort and following the lead of Senate Democrats would send a clear signal that House Republicans do not trust the private market to set the terms for large loans.  It would also expose taxpayers to further risk and jeopardize future reforms to Fannie and Freddie because in Washington, it is always “just one more” bailout or “just one more” subsidy.  Increasing the conforming loan limit to levels authorized by President Obama’s stimulus will send the signal that everyone in Washington is fundamentally unserious about reforming Fannie and Freddie.

Instead of caving, they need to stand on principle and reject an increase in the conforming loan limit.  Their message would be clear: taxpayers do not need more government-induced risk; the private market can and should establish conditions for jumbo loans.  That sort of change is something Americans can get behind in 2012.

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