We have reviewed a new academic study taking on a question long critical to GSE reform: where to set the GSEs’ conforming-loan limit. The study is problematic in several respects, but – regardless of its sometimes-dubious models – it provides useful empirical data showing that the boundary line at which conforming loans are set drive a lot of arbitrage behavior that advantages wealthy households. As we have long noted, income targeting – not loan-balance thresholds – is a far better way to ensure that government-backed mortgage credit goes to those for whom the private market either doesn’t work or works only at undue cost. First-time empirical data about changing behavior at the conforming-limit boundary reaffirm this policy conclusion.
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