Dean Baker on the Future for Frannie and Freddie

Here is Dean Baker:

Some folks may have noticed that the stimulus package raises the limit on the size of the mortgages that can be insured by Fannie Mae and Freddie Mac, the two huge government created mortgage agencies, from $417,000 to $730,000. This is supposed to help the housing market in high priced markets, where the current limit may not even be sufficient to purchase the median priced house.

There has been very little analysis of the impact of this measure in the media and all of the commentary has come from economists who somehow managed to miss the housing bubble. If the media had relied on a broader array of sources, they would have told the public that the move is likely to hasten the collapse of Fannie and Freddie.

Why? Well, what happens as home prices drop and people walk away from their houses?

The capital base of both Fannie and Freddie is very limited compared to the amount of debt that they insure. As the foreclosure rate continues to rise, they will both be forced to take large write-offs and will soon be pressing up against the limit of their capital base. Raising the cap on conformable mortgages will hasten the date where this will occur.

Look for analysis in the media from surprised economists when Congress debates the bailouts of Fannie and Freddie.