Fannie and Freddie shouldn’t backstop million-dollar mortgages

President Trump made headlines when he announced his administration was seriously considering taking Fannie Mae and Freddie Mac public after almost 17 years of government management..Clearly, this conversation is long overdue. The president plans to fix America’s housing finance system, and it’s important that his plan protects taxpayers, reduces government influence and protects the safety and soundness of the Government Sponsored Enterprises (GSEs). Since GSEs are jointly responsible for more than $8.5 trillion in U.S. residential mortgages, policymakers must shrink the government’s footprint in the U.S. housing market and lessen the probability of another bailout akin to 2007-08. Fannie and Freddie may back these mortgages on paper, but it is actually taxpayers who will be saddled with the cost of a bailout.The president has the authority to release the GSEs, but Congress bears the responsibility to adjust the status quo through comprehensive reforms. When former Rep. Jeb Hensarling (R-Texas) chaired the House Financial Services Committee, the political will simply wasn’t there to pass a taxpayer-friendly housing reform bill despite a handful of attempts. Today, with slim Republican majorities, there’s little appetite to even author a discussion draft to fix the GSEs.Even if comprehensive reform remains elusive, at the very least, Congress must act to reduce the amount of exposure and mortgages taxpayers must guarantee, slowly reducing the amount of liabilities Fannie and Freddie hold on their balance sheets.Congress needs to reform the conforming loan limits. Fannie Mae and Freddie Mac are limited by law to purchasing housing mortgages below a certain dollar size which are then repackaged into mortgage-backed securities. In calendar year 2025, the GSEs may purchase mortgages in high-cost areas up to $1,209,750, which is exceedingly high. It is essential that Congress eliminate the high-cost loan limit so taxpayers no longer back million dollar homes in some of the most expensive zipcodes in the country.The high-cost loan limits increase every year, so taxpayers will be on the hook to underwrite even more expensive mortgages, increasing future exposure to even more severe losses in the event these borrowers default on their obligations. Not only does the higher conforming loan limit increase risk for taxpayers, it takes business from a willing private mortgage insurance market, while undermining the prospects for true housing policy and GSE reform in the future.According to the Department of Housing and Urban Development, the average sale price of new houses sold in April was $518,400, roughly 42 percent of the high-cost loan level and much lower than the “regular” limit of $806,000. The majority of home sales above $1 million are concentrated in a handful of states, including New York and California. Fewer than one-in-10 sales are above the $1 million mark, let alone $1.2 million. Ending the high-cost loan level will only impact a small portion of the housing market, and there is little evidence to suggest that liquidity would dry up for this market. For homebuyers above the limit, there is no shortage of mortgage options. These credit-worthy borrowers can look to banks and other private mortgage securitizers to underwrite their loans. It’s simple: shift liabilities from the government’s balance sheet onto the private market. Gradually reducing the conforming loan limits will reduce taxpayer risk, end a subsidy for higher-income borrowers, and allow the GSEs to focus lending to those on the lower-end of the income scale. In doing so the U.S. housing finance system will become a largely private market without added taxpayer liability and risk.Right-sizing the government's role in the housing market remains the single most unfinished business of the financial crisis. In addition to ending the high-cost loan limit, Congress should also consider other commonsense changes about which mortgages should be backstopped by the federal government, including vacation homes, second homes, investment properties, cash-out refinancing and non-first time homebuyers. There’s no shortage of simple solutions to incrementally protect taxpayer interests in the secondary mortgage market. Congress simply needs to find the will.Thomas Aiello is senior director of government affairs at National Taxpayers Union.