Bernanke's big idea

Much of the attention of Fed Chairman Ben Bernanke's testimony before Congress on Thursday was focused on his remarks about the economy. Ben's bottom line: The slumping housing market won't derail the economy.

But the Fed chairman also suggested a bold new idea: government-backed mortgage guarantees for home loans of up to $1 million.

From MSNBC.com: "Bernanke proposed the so-called 'government-sponsored entities' like Freddie Mac and Fannie Mae pay mortgage insurance fees to the federal government. These GSEs would then guarantee loans that are larger than the current $417,000 limit on so-called 'conforming' mortgages."

New York Democrat Charles Schumer endorsed the idea and said he might back it with legislation.

Bernanke's plan would certainly quiet those who believe the conforming loan limits should be raised to jumbo status to help solve the current credit crunch. And Freddie and Fannie would pay mortgage insurance fees to the government. Ben also says he would want the new loan guarantees to be temporary.

Is it a good idea?

Big Ben also told Congress that the Fed plans to issue a proposal by year's end that would create new standards for all lenders that issue sub-prime loans.

About time.

Comments? Thoughts?

-- Posted by Annette Haddad

Photo credit of Jumbo the elephant: Melville Munro (1935)

P.S. A shoutout to reader Xtine for calling attention to a N.Y. Times article today about a hapless real estate speculator who lost it all. Enjoy.

Comments

[Carmel]

It's a TERRIBLE IDEA. What these officials miss is that current prices are unsustainable and are not justified by economics. Prices need to come down in L.A. because they were inflated due to FRAUD & GREED.

Why should future home buyers be strangled by monstrous debt? It makes no sense.

[Hula Girl]

Love the elephant photo w/ this story - It almost looks like a Trojan Horse.
I'm no economist but it seems that raising the conforming limit to a million bucks is like throwing crack to addicts. The real estate market and loan system are going through withdrawals when they should be going 'cold turkey'.
The economy is in rehab and we've got "Lindsey Bernanke Lohan" in denial.
Admit we have a problem, Ben. That's the First Step.

[Michael Snyder]

Quoted from an article published on-line by Associated Press:
“Further worries about the continuing credit market slump kept investors on edge a day after Federal Reserve Chairman Ben Bernanke said he expect the economy to "slow noticeably" this quarter. His comments added to the week's declines — contributing to a slide this week on concerns about continuing credit woes, a weakening dollar and rising oil prices.
He also said the greenback's problems "may have some effect on import prices" — which was confirmed Friday in new government data. The Commerce Department reported U.S. import prices soared last month at their fastest pace since early last year while export prices jumped at more than a decade high.”
Is this more “Greenspeak” or just another “duh” a Bush appointee is claiming to discover? Statements like this make me feel like there’s a five year old driving the locomotive. Although I’ve been harping on the issue of raising the ceiling on Fannie & Freddie loans for a while I sense a rodent lurking in Bernanke’s statement.
I’m always leery of the government collecting fees for a purpose and then depositing those fees into a general fund. Kinda like co-mingling funds in escrow. Secondly, more than doubling the current ceiling smacks of another good old boy bailout. A limit of six to seven hundred thousand dollars would more than suffice for the market’s needs while managing risk appropriately. That million dollar number has nothing to do with ninety percent of the housing market and smacks of yet another helping hand for Wall St. backed developers.
If you check your refrigerator you’ll find most things green eventually turn brown. Greenspeak is no different.

[Justin McCarthy]

This is exactly what is needed here...Now if they'll only include stated income loans in these guarantees as well...

Those anti "bail-out" folks that are whining should wake up: Realize that if you don't consider what you call "bail-out" you will have BIG problems: WeakER dollar, no Asian extended credit, recession/sand bagging economy, job loss and on and on. This bull needs to be grabbed by the horns right here folks...

Even if one were to entertain the idea that "bail-out" is funded by tax dollars and these schadenfreudes successfully fight any government help, they shouldn't worry too much since their future tax dollars (including those in their compromised life savings) won't be worth anything anyways....Pay now or pay BIG later.

[sunsetbeachguy]

They could up the conforming limit to $1M but Fannie, Freddie & FHA still have some of the better underwriting guidelines.

Most people who got a $1M loan from New Century won't be able to get a $1M loan from Fannie/Freddie since they don't buy stated income/asset loans, or any other of the toxic dreck out there.

More re-arranging the deck chairs on the titanic by the politicians.

[jdj]

worst-idea-ever
If you went to the store today and the price of a gallon of milk had gone up $50, you wouldn't say "Gee, I need access to cheap money so I can get milk." No, you would say "What is up with the price of milk, and something needs to be done to bring the price of milk down." Same with the price of gas.

So, why does Bernanke want to just throw more easy money at inflated assests that were inflated with easy money to begin with?

[TakeFive]

"But the Fed chairman also suggested a bold new idea: government-backed mortgage guarantees for home loans of up to $1 million. "

Is this guy insane? We saw what happened when easy credit was extended to unqualifed buyers: price inflation and massive defaults. Now this guy want's to imdemnify the lenders against their stupid mistakes using my tax dollars?!

Why don't we just quit pretending and announce that our government will henceforth operate under the priciples of socialism. Capitalism was just to unfair because some people lost money when they made stupid mistakes or committed outright fraud. Socialism will put everything right.

[Mary C]

It's a terrible idea to have government-backed mortgages up to $1 million dollars. It's just going to support overpriced housing. Plus, why should the taxpayers subsidize any more risk in the lending markets then we already do, especially for high-income earners? No. I can't believe that Chuck Schumer, a supposedly liberal Democrat, supports this proposal.

[MyLessThanPrimeBeef]

It looks like Greenspan should have the spine to stick to his orginial prediction made earlier this year about a possible recession. Instead, he caved in.

http://www.post-gazette.com/pg/07061/766190-28.stm

[BetterVillage]

I saw a savvy fellow on the news last night who echoed my thoughts that we can contain the blast radius of the mortgage bomb by calming way down. The talking heads definitely need to aknowledge the problems, but they and even the press, imho, need to stay calm, cool, and collected. To throw out "raise the agency limits to $1M" without further explanation seems irresponsible.

Also, on the other side of the coin of raising the limits, the intent might actually be to bring the jumbos under the bailiwick of the GSE's to more closely monitor their quality. In the biggest bubble zones like california, this could prove effective in limiting fallout going forward? Keeping overextended folks in million dollar homes might not be palatable, but it could possibly be just a distasteful side effect. There are still going to be lenders who do jumbos as non-agency loans, but one would hope that wall street investors would get blown out of the water by the GSE's.

[T]

I think sunsetbeachguy is right - this is not a bad thing. Don't forget that conforming loans are not "easy money". They have conservative qualification requirements. I've never heard that there is any problem with current conforming loans - on the contrary those are the stable ones today. Maybe raising the conforming limits will cover most of the dummies out there and push the private money loans up high enough to where only more sophisticated borrowers exist?

[formerlahomeowner]

Freddie and Fannie can raise their loan limits to heaven for all I care. Raising the GSE's loan limits will be a minor cushion to the crash. The bottom line is affordability of the house.

It's math time class:
Purchase price: $1,200,000
Amount of loan: $960,000 (20% down, which will be a requirement for these loans. How many people have $240,000 lying around?)
Monthly principal and interest (30yr fixed @ 6%): $5755
Monthly Property Tax @ 1%: $1000
Insurance: ~$200
HOA and maintenance: Let's just say it's free to make it simple.
Monthly nut: $6955.
Monthly income needed to qualify (let's be generous and use 32% of gross for housing): $22,000 per month.

Raise your hand if you make close to $240,000 annually. Where do I sign up?

[Tombstone Realty]

So...say I go out with my $49K salary, and get a mortgatge for a $700K pillbox in Alhambra. But oh my stars, I can't pay for it after all! The bank goes to the government - this loan defaulted, you must guarantee it! - and the government sucks up the loan. Now, multiply that by, ohhh, 50,000.

Fun yah? Makes me feel all warm and fuzzy inside.

I don't have faith in the government's ability to handle the economy, I don't trust the banks to tell the truth, and the dollar isn't worth the paper I wipe with. A Trifecta of Disillusionment!!

[Cal]

Why its a bad idea:

GSE have the implied backing of the US gov't. They are too big to fail and should be very conservatively managed because of that.

GSEs are losing money: http://biz.yahoo.com/rb/071109/fannie_earnings.html?.v=2

GSEs have had accounting scandals and have to earn trust again not be given it.

The conforming limit has gone up much faster than median income. The conforming limit isnt the real issue.

Why it isn't a bad idea.

If its full doc, low CLTV, and securitized (sold in the secondary market), Then it really doesnt matter what the limit is, the risk is very low. The problem is both that that type of loan wont "help" the market and is too low risk (low profit) for them to consider it.

[Tom123]

If the prices of homes go down to far that will mean more defaults, which in turn will mean[people want spend as much (even those who have plenty of money and good credit), which in turn the economy will slow down, which will mean lay offs, which will mean even if you could afford the house at the lower price, you wont be able to, because you don’t have a job.

If you want to buy a house in Socal choose a profession that pays more, if needed go back to school. Otherwise move to an area like South Carolina where the prices of houses are under 100k

[MyLessThanPrimeBeef]

Last night, as I was trying to stay awake around 10PM, which seemed like midnight, a thought occurred to me - We humans are so powerful. We can tell Time to do whatever we want...by decree. Instead of the time being 11:30AM, we just call it 10:30AM and pronto, we have 10:30AM.

Now, why don't we just say, by decree again, that henceforth, $1 now is worth $2 of the old currency. Then, every working subprime borrower has instantly twice as much money to bring his loan(s) current.

It's much easier than the water-torture like lowering of rates and it also teaches our kids a very good lesson - hey, if you are going to debase your currency, be upfront about it. Honesty is the best policy.

[jdj]

So, Tom 123, if someone owes you 100k and they told you they couldn't pay you back, you would just eat the loss for the good of the economy?

[MyLessThanPrimeBeef]

I wouldn't say it's a big idea.

It's a subprime idea compared with raising the limit to $2 million.

Heck, why not $3 million?

[Johnny B]

A TERRIBLE IDEA. Bernanke and the Fed as a whole have no credibility with the middle class and down… same as Greenspew. In (very) general terms, they’ve created REAL wealth for the rich few and FAKE wealth (or financial servitude) for 95% of the population. That’s their job. Unless, of course, you consider enormous DEBT, real wealth.

Justin McCarthy, you’re post is idiotic… Perpetuating the artificially induced, over inflated housing market by doubling (or tripling) loan limits with additional artificial support (and ultimately tax dollars), will DEEPEN and EXACERBATE the country’s financial problems in the long run. The economy NEEDS a severe shock to correct… meaning folks seeing things for what they are and for what they’re (reasonably) worth.

I don’t need some billionaire banker telling me that the 2001 priced $200K house down the street is really worth $700K in 2007 and that it should stay that way. The smoke and mirrors of derivative based investment products, self-interested risk assessors, under regulated bankers/lenders, lap dog appraisers and corrupted political leaders will NOT be aided by bigger, blurrier “fun-house” mirrors, even more smoke, strobe lights, slight-of-hand, shell games, clowns with made-up smiles prancing, ring leader misdirection, lobbying puppet-masters, etc, etc.

It will be aided by a complacent, self-deluding, miss-informed populace.

Keep it real Ben…

[MBwatcher]

The important question here is: Cui bono? (Who benefits?)

The government (oh sorry, the GSEs) are going to pay mortgage insurance.

Good for borrowers.
Good for lenders.
Good for insurers (we assume the rates will not kill the biz).

Ah, but, within that "good for borrowers" -- what does it do to behavior? Are you any more or less likely to foreclose on (walk away from) an insured mortgage? Probably no change.

Lenders -- no incentive to change practices; loans are increasingly risk-free.

Insurers -- they can make this work.

EVERYONE ELSE: It seems the collective effect is to leave home prices flat at current levels. Now who is that good for?

[Drew]

This is off topic, and I apologize for doing it, but I have a question.

What does foreclosing on your house cost (average)? The reason I ask this is because if all these people foreclosing on houses end up having to owe a good chunk of change when they do lose their house, where are they getting the money? Isn't the reason they're foreclosing the fact that they don't have the money?

Thanks for feedback.

[aldo818]

I won't pretend that I know what will happen if they raise the limits to $1MM but it doesn't seem like it makes sense when most homes nationallly cost only about $250,000. At least I think that was the last number I heard.
I know that the coasts prices are higher but that's because there are higher incomes to pay the higher amounts.
I guess, I just don't believe that the government should get involved in insuring a $1MM dollar mortgage.

Maybe I'm just crazy but shouldn't we be providing more help for people that have trouble just having a place to live instead? I would support affordable housing for the poor, not for the top 1% to live in a $1MM home.
Afterall, how are we supposed to expect people to fill the lower wage jobs when they can't even live here?

I'm feeling a bit dramatic today. Can you tell?

[Aaron Kramer]

I have a better idea. Why doesn't the government just give every citizen a million dollar home and a bank account with 1 million to match. In fact we can all go down to any store and take what we want without paying. Oh I forgot to add that you don't need to work or go to school if you don't want to just take what you want. Additionally we should extend these benfits to any illegals who are currently in the country or want to join the party at a later date. What a joke!

[Enlightenment]

No welfare for the wealthy! USA is going down the tubes and congress needs to QUIT wasting our money! Just flipping quit wasting money! It is a big flipping mess, and you won't be able to fix it with my tax money!

California prices are overpriced and appreciated too fast, so quit trying to fix this mess, the only solution is for the prices to fall, and that is why it was called a housing bubble.

Only a FOOL would buy a house right now! Don't be a FOOL!

[Stephen Meirowsky]

Raising the limit to $1,000,000 will NOT stop the bubble from bursting. Only a FOOL would buy a house right now!