A broader federal response

Most who comment here seem to believe we are still in the early stages of a real estate downturn, with no sign of a bottom yet. If you are right -- and we think you are -- it follows that that the federal government, too, is in the early stages of its response, and will likely broaden its response as the housing market weakens.

That is what appears to be happening in Washington this week, starting with the Federal Reserve's half-point cut. Now the Bush administration is back-pedaling a bit, indicating it is willing to allow the bigger role for Fannie Mae and Freddie Mac that Democrats have been advocating.

News item from the AP today:  "Treasury Secretary Henry Paulson ... signaled that the administration would consider allowing the big mortgage companies Fannie Mae and Freddie Mac to temporarily buy, bundle and sell as securities any loans exceeding $417,000, known as "jumbo" loans."

MORE: "The idea, which represents a policy change for the administration, is portrayed as a way to inject liquidity into the stretched mortgage market.  Paulson said the change involving jumbo loans could occur only in tandem with tighter oversight of the two government-sponsored mortgage companies."

Your thoughts? Comments? Email story tips to lalandblog@yahoo.com.
Photo Credit: Reuters

Comments

[jb]

rearranging deck chairs on the Titanic.....(at the expense of savers)

[MyLessThanPrimeBeef]

But who will even just watch over Standard & Poor's and Moody's?

I think we need a special tax on Wall Street firms like Goldman Sachs, Lehrman, Bear Stearns, etc, called 'We Know You Will Need Bailouts Again in the Future' tax.

It's a pre-emptive move for the next Long Term Capita Managmentl, Ernon, Dot Com bubble, Emerging Market debt crisis, CDO's...

Have these guys ever paid back the government for helping them out?

[amir]

Who exactly needs these jumbo loans? Isn't the median house in the US $250,000? Even in inflated California a $417,000 loan and a 20% down buys a median house.So who are these loans for?

The answer is flippers, hedge funds and bankers. Thank you US government for taking care of our interests.

[John Bard]

"Who exactly needs these jumbo loans? Isn't the median house in the US $250,000? Even in inflated California a $417,000 loan and a 20% down buys a median house.So who are these loans for?"
In answer to your question amir, me! A 2-bedroom 2-bathroom Spanish round the corner from my (rented) apartment can not be found for under $1million. And I'm not in Beverly Hills, just mid-town L.A. Wake up and smell the Red Bull - house prices VARY in different parts of the country, D'OH!

[Steven]

"Even in inflated California a $417,000 loan and a 20% down buys a median house.So who are these loans for?"

Really???... you looked into that as a fact??... Fact of the matter is hundred thousands of people need those type of loans to refi their homes...In L.A. alone the median house goes for as of SEP 07.... get this.... $520,000... Thats just L.A... we're not even talking about Orange County let alone any other parts of California.

[investorguy]

Amir, you're wrong. They're also for anyone buying in a neighborhood that's higher than the median, which would be half the homes for sale - it's simple math. But I'm sure it's much easier to automatically scream "hedge funds and flippers!"

[aaron Kramer]

This will monetize the debt and cause massive inflation. Ladies and gentleman we will all pay to bail out the lenders. Don't let the media,(not this blog) fool you, the government bail out is for the lenders. Single famliy housing, housing purchased to be lived in, is a consumption good not an investment.(A homes depreciate over time due to wear and tear, land never depreciates) Investments kick off cah flow and this cash flow, or the present value of future cash flow determines the value of the asset like stocks and bonds. A mortgaged piece of property is an investment for the bank and a liability for the borrower. Since housing is a consumption good like televisons, clothing and food, lower prices lead to increased purchasing power for consumers.(And they say lower prices are bad)This is why people talk about the benefits of trade with China,cheap goods, and illegal labor, cheap labor. The reasons why people don't want to see falling home prices are two fold. The first is because the purchase is leveraged, so any decline leads to greater than anticipated losses. The second reason is the banks know the will be stuck with under performing loans and their investment will became a liabilty. Don't forget that some of the reasons why we are enticed to purchase homes( that we pay 3 times the purchase price for) is the tax benefit and the opportunity to make up to 500,000 tax free. If we can't make any tax free money and our home's value is decreasing, why would anyone in their right mind purchase a home? If we don't take out mortgages then lending institutions will stagnate because the cash flow from futere loans will dry up. This is why Mozillo and the Fed don't want housing to fall. They are not interested in helping Americans, if they were they would change the payment scheme from front end amortization, to 50% of your monthly payment going to the principal starting in the first month. THIS IS A BAILOUT FOR THE BANKS AND CONGRESS IS TRYING ITS HARDEST TO SPEND OUR MONEY TO HELP THEM.

[Jonah]

The jumbo loans are for the 97% of the LA population that is priced out of the market and don't have the downpayment. That's why areas like ours needs those loans so bad.

[amir]

Oh my God I started a storm!

My question as to who needs a jumbo loans was rhetorical. I know we all need them to buy houses in LA.

My point is (although I probably failed in making it...) that it's not the government role to support jumbo loans because of bubble market conditions. Government loans are for middle income Americans or the less financially fortunate ones. Most of the country does not need jumbo loans.

As for our own inflated market, it's better if the prices adjust to a reasonable valuation so that $417,000 loans are used instead of the entire federal government changing their rules to support a bubble about to burst.

I'm not against jumbo loans, I'm against the government guaranteeing them.

[Mike S]

Kramer, Amir and JB are right.

There seems to be cognitive dissonance here: Everything points to a 20%+ price correction, dropping the average LA home by over $100k. That puts the average LA home safely in the conforming loan category. Even a present day $650k "for sale" house will be a 80% conforming loan at the present cap when the prices return to being more aligned with the actual value of the home. Fannie Mae and Freddie Mac ONLY EXIST to help poor to average Americans afford houses and there is absolutely NO WAY someone purchasing at $650k or above anything is poor-to-average.

So the "it's a $1m in my neighborhood" only exemplifies how perverse prices got in the 'bubble up' period. That neighborhood and its $1m dumps will suffer far more than 20% price decline since the value simply does not exist--even before high interest rates return-- Greenspan predicts 10%+.

Simply reconcile what a price decline and return to traditional lending standards means. There simply is no economics-based justification for raising the caps. It will simply spur inflation as the world loses confidence in the US's ability to manage itself.

[jdj]

MIke S,

Thank you for your excellent response.

This conforming loan limit is by law supposed to be tethered to the median price and should have gone DOWN this year to $416,300 but the bailout actually began last November when lawmakers decided keep it at $417,000 by fiat.

http://calculatedrisk.blogspot.com/2007/07/conforming-loan-limits-subprime-excuse.html

[dog-walker]

"This will monetize the debt and cause massive inflation.... the government bail out is for the lenders."

I am perfectly willing to entertain the probability that I am a moron... but... I've always understood that monetized debt benefits the debtor NOT the lender.

If I had a nine-hundred thousand dollar loan, I'd much rather pay it out with smaller future dollars after inflation than with larger future dollars after deflation.

Right?

[aaron Kramer]

Dog,
Your not a moron you are correct and misquoted me by linking two senteces. What we are talking about is private debt that is going to be monetize into the publics money supply. The increase in the money supply devalues existing dollars and inflation ensues. When prices go up the dollars in your pocket purchase less, thus the entire population is forced to pay for the stupidity of a few borrowers and reckless lenders. Additionally the fools who started the mess, foolish buyers and lenders, are rewarded. The leveraged buyer gets to pay back his debt with devalued currency and the lender retains its investment. Lower prices reward savers as the currency in their pocket buys them more stuff. When a buyer buys a home to live in, they are buying a comsumption good, it is not an investment for the buyer. Individuals are buying a "quality of life" product. The lender is the one who is making an investement which is why it receives cash flow(Monthly mortgage payments) from the borrower. The bail out benefits the banks because the borrower is not walking away from the home turning the lenders investment into a liability. The bail out is subsidized by the populace at large and it gets worse. The poor (the 30% of the population that doesn't own a home) don't get to benefit from the devalutation because they are not leverage to the hilt and the lose purchasing power. Finally the rich guy(from a cash flow standpoint or outright wealthy) who leveraged their 2 million house reap huge rewards as well. This ultimately increase the disparity between those on the top of income strata from those on the bottom. I hope this helps.

[speedlet]

Jonah --

If you don't have the downpayment, you shouldn't be buying a house.

[ashkan]

To: dog walker & aaron K,
If you had a $900,000 loan , your house is worth much less than the loan in deflation. You may be paying back in dollars worth more on an asset worth less. It's not good in deflation because the money you use to pay your home may be lost when your job is lost in higher unemployment. Whatever your home is worth and whatever your equity is, that will go down in deflation. Your loan amount possibly bought in an inflationary run-up won't go down. This seems like a problem.

[aaron Kramer]

Ashkan

Of course it is worth less but that is no reason to artficailly support prices. If the economy is so fragile that any price deflation rip it to shreds than one has to ask is it worth saving? Alot of people are going to be upside down on their loan and there is no avoiding that! The longer we prolong the inevitable the worse the the depression/recession will be. Do we bankrupt everyone or do we allow the weak to fall and then pick them up? Depending on who you believe somewhere between 40-50% of homeowners own their home outright. If all prices fall than they will not be worse off because their house will fall along with other homes they might want to purchase in the future.Finally you hear many people bemoan the fact that there isn't any affordable housing in CA, NYC, NJ etc. and lower prices make housing more affordable. Using your logic the state should TAX dollars to prop up housing and build affordable housing. This is a double whammy and only looks the poor in their plight. Housing only can become more affordable if incomes go up (not likely to happen when one considers the amount of illegal labor competing against low skilled American labor), or prices come down. I have no sympathy for the over leveraged self indulgant baby boomer in the scenario you described.

[aaron Kramer]

Ashkan
A few other points. The equity people thought the had was nothing more than an illusion. Profit unrealized is profit lost. Finally were any of these affected homeowners going to share in their up side profit to help the poor and disenfranchised? I'll answer my own question NO! In fact the tax code gives those with access to capital the opportunity to $500,000 tax free. Can the poor make money tax free? NO