A housing rescue that would go too far

By Valentine's Day, Congress plans to shoot a mix of stimuli into a disheartened economy. But there's one arrow in its quiver that would miss the mark: An increase in government-sponsored credit for home loans. Lawmakers want to subsidize mortgages up to $729,000 – a nifty gift for the well-off.

A little-noticed measure in both the House and Senate stimulus packages would let the federal handmaidens known as Fannie Mae and Freddie Mac start buying (and reselling) mortgages above their current limit of $417,000. The action is meant to be temporary, but that's not a likely outcome.

The higher cap would allow the two enterprises to back so-called jumbo loans up to 125 percent of a region's median home price. It would mainly help home buyers who earn more than $150,000 a year. In still-inflated markets such as San Francisco, Washington D.C., New York, and Seattle, such a step means Uncle Sam would ride to the rescue of the upper-middle class.

Fannie Mae and Freddie Mac weren't set up by Congress to assist such folks. These publicly traded corporations are supposed to bring the American dream to the less well-off.

But that hasn't stopped the giants, which spend big on Capitol Hill lobbyists, from using such allies as the National Realtors Association and the National Association of Home Builders to broaden their franchise.

The proposed mortgage perk is aimed at solving a problem that really lies elsewhere – in credit markets torn apart by badly managed securities that bundled millions of high-risk subprime mortgages for investors. Investors remain reluctant to take on jumbo loans until financial institutions come totally clean on their mortgage-related losses.

For now, this credit cleansing has left jumbo loans with higher interest rates relative to the smaller loans that Fannie and Freddie now back. In wealthier housing markets, fewer jumbo loans means suppressed demand and lower prices. That's not a market correction many relish.

But this measure comes with problems other than a break for the affluent. It would put a burden on these two institutions that they may not be able to bear. Fannie and Freddie have suffered in this subprime crisis and are still recovering from recent accounting scandals that reduced confidence in their stability. Their ability to now handle jumbos is in doubt.

And if they were to falter in general, the ultimate guarantor – taxpayers – would be on the hook. With their combined $1.4 trillion in assets, a rescue of these mortgage mammoths might cost more than the Iraq war, not to mention the fallout in financial markets.

What's more, Congress has yet to pass tough oversight of these now loosely regulated giants. The White House, which only reluctantly went along with the proposed higher cap on mortgage loans, must make sure lawmakers pass an oversight bill.

Or perhaps it's time instead to break these two institutions into smaller parts because of the risks they pose, and to refocus such loan aid only on low-income Americans. Fannie Mae and Freddie Mac now own or guarantee 40 percent of the mortgage market.

As any investor knows, it's always best to spread risk.