Would Fannie & Freddie Lift Conforming Limits in Stimulus Package? (FRE, FNM)

If you look at the share prices in Freddie Mac (NYSE: FRE) and Fannie Mae (NYSE: FNM) you might wonder if this is euphoria over the fact that there is at least some decent news in the financial sector after you saw today’s key earnings weren’t the same as Vikram Pandit & Co. yesterday.  If you see our article on "Financial Mergers May Be Mandated Rather Than Preferred" you will get a feel for what may be coming down the pipe.

What is interesting is that it is mostly on market chatter.  Now that the government is supposedly working on a financial stimulus package, the speculation is rife as to what this will be. It appears that some are speculating that the conforming loan cap may be raised from roughly $417,000 up to $500,000 and some are thinking that it might even be higher than that.

We would caution against raising this number too high because even this $417,000.00 limit is actually be part of the problem in the current subprime and Alt-A debacle.  Historically without the funny money loans and with higher rates, this would net roughly a $3,800.00 per month mortgage plus or minus a few percent after property taxes and PMI.  Many families cannot afford that after you take into consideration basic living expenses and income taxes, even after the property tax and interest deductions.  Making loans available to easily for too much money just compounds risk on risk and may just drag the since of 2005 to 2007 out much farther than this would otherwise go.

With just under an hour to the close today, shares of Fannie Mae are are up 3% at $37.40 and shares of Freddie Mac are up 5% at $32.35 today.  Both shares are down roughly 50% from their highs over the last year.

Jon C. Ogg
January 16, 2008