US to Insure $1 Million Jumbo Mortgages

Implications: Good news for Fannie Mae and Freddie Mac.  Fed Chairman Bernanke supports increasing the size of mortgage loans that these GSEs can buy, from $417,000 to $1 million.  Bernanke also wants the U.S. Government to back securities issued by the GSEs.  It could help the financial industry unload some of these mortgages, but it will certainly help increase Fannie and Freddie's profits.

Analysis: During Congressional testimony today before the Joint Econmic Committee, Fed Chairman Ben Bernanke told Sen. Jeff Bingaman (D-MN) that a good way to fix the broken down mortgage system would be to raise the limits on loans that could be purchased by Fannie and Freddie, and then sold to the secondary market in the form of securities.  Bernanke also thought that it would be important for the U.S. Government to explicitly back these securities.  The Fed Chairman later told Senator Schumer (D-NY) that the new limit should be $1 million.  Schumer announced that he would introduce legislation to effectuate this suggestion, and hinted that he might even go as far as authorizing the purchase of $3 million mortgage loans. 

The Fed's opposition to raising the GSE conforming loan amount, and limiting the GSE's portfolio of mortgage loans has been a key factor in Congress till now.  The fact that the Fed is apparently switching positions may mean that legislation along these lines will pass.