Update: Higher loan limits for Freddie and Fannie

Get ready for the new Jumbo loan cutoff: call it the Jumbo Jumbo: $625K and above.

News item from LATimes.com: "The [stimulus] package also includes a provision to make refinancing mortgages easier by raising the limit to $625,500 for most government-backed housing loans. That is expected to make more funds available to homeowners in expensive real estate markets such as Southern California who want to get out of their adjustable rate mortgages."

That's pretty big news, a shot in the arm to California real estate, and to lenders like Countrywide looking to unload jumbo loans. It means lower interest rates for jumbos, among other things. It's also a tribute to the accuracy of commenters on this blog, who were chattering about rumors to this effect earlier in the week -- even though those rumors were not widely covered by the mainstream press. Good on you, you unwashed bloggers.

More, from L.A. Times:  "Currently, the government's mortgage guarantors, Fannie Mae and Freddie Mac, can purchase mortgages only up to $417,000, and funds have largely dried up for homeowners who want to refinance mortgages above that limit. The legislation would temporarily raise that limit to $625,500, making it easier for banks to make loans to homeowners who owe more than $417,000 on their mortgage. It would also raise the limit on loans insured by the Federal Housing Administration to $729,000."

The Washington Post: "The package would temporarily increase the size of jumbo mortgages that can be bought by government-sponsored Fannie Mae and Freddie Mac, from $417,000 to as much as $625,500 in high-cost housing markets."

My take: I will be shocked -- shocked! -- if such an increase proves temporary.

Update: Why did the administration roll over on this issue? Its opposition to higher loan limits for Fannie Mae and Freddie Mac is well known. From NYTimes.com: "Mr. Paulson, at a news conference, acknowledged that he was not happy about that. “I got run down by a bipartisan steamroller,” he said. “Republicans and Democrats reunited on this.” I suspect if the truth were knowable, the higher limits had three powerful blocs of support: members of Congress from high-cost areas (Pelosi, etc.), the real estate lobby and, probably most important, banks and lenders. Bank of America has to be very, very happy with this.

The White House does not mention the higher loan limits in its description of the stimulus plan here.  One argument against higher loan limits is that it increases Fannie and Freddie's exposure to the housing bubble, with predictably negative consequences.

Comments? Insights? E-mail story tips to peter.viles@latimes.com
Photo Credit: Treasury Secretary Paulson and President Bush, via Whitehouse.gov.

Comments

[Christopher]

Whoa! That's big news.

And I was just beginning to contemplate this question:

Was the Fed rate cut good for Los Angeles???

See: http://terrafirmala.com

[Mike P]

In other words, taxpayers all across the country are now on the hook for California-sized mortgages. I bet they're THRILLED!

Can you refi if you're underwater? I don't think so.... So watch for a mini-boom in appraisal fraud as lenders 'creativity refinance' people into new 'conforming' loans.

What crap!

[sfvrealestate]

Okay, here's a challenge for all you personal-responsibility and let-the-free-market-rule posters (and you know who you are): I want REAL WORLD reasons from you as to why this is NOT a good idea. No theoreticals about where the market should go/government bail-outs, etc. (And, for once, please no Realtor bashing!) Just real world reasons as to why this isn't helpful. Please skip the it's-our-tax-dollar reason, as my tax dollars already go to lots that I don't believe in. I'm interested to hear your side of this.

[jdj]

Fannie and Freddie can't even handle $417, 000. Who believes they can handle $730,000? They are hemorrhaging billions already.
http://www.bloomberg.com/apps/news?
pid=newsarchive&sid=axvNnmqtx_6c

[TakeFive]

Can't say I'm suprised. I knew the banks would find some way to transfer the risk to the taxpayers. Anyone have a guess how much they paid for this gift? No doubt worth every cent.

Well, those of you that had any moral or ethical reservations about walking away from your mortage - you can eliminate that from the equation.

Will the banks say "we made a bad loan, but we'll stick with it and live with the consquences"? Not bloody likely. They'll call it a Triple-A rated paper and sell it the next day at face value - to you - the taxpayer.

[Cal]

http://www.ofheo.gov/newsroom.aspx?ID=
410&q1=1&q2=None

"STATEMENT OF OFHEO DIRECTOR JAMES B. LOCKHART ON CONFORMING LOAN LIMIT INCREASE

We are very disappointed in the proposal to increase the conforming loan limit as we believe it is a mistake to do so in the absence of comprehensive GSE regulatory reform. To restore confidence in the markets we must ensure that the GSEs’ regulator has all the necessary safety and soundness tools."

Here is the OFHEOs take on GSEs and jumbos:
http://www.ofheo.gov/media/research/
MMNOTE11108.pdf

The real big deal is that FHA gets in the game now in a lot of areas now due to the rise in limits.

While I dont think this will have a big impact in California, due to the tighter underwriting standards that the GSEs employ, there is a big unintended consequence on the housing market... that the GSE capital will be soaked up by California (and other parts of the country) Jumbos leaving a lot less for everyone else.. rates will go up as a result and the stress on the GSEs will increase.

[MyLessThanPrimeBeef]

Typical Al Quaeda like tactic - first you give them one bubble. Then as they busy themselves running around putting out the first bubble, you hand them another bubble by given them more lower rates and higher conforming limits.

The result? - even more devastating carnage.

[LAKLO]

You're right, Peter -- this is big news for the LA real estate market! A couple of comments, though...

First off, the increase in the conforming loan amount is just a proposal at this point -- it is not law. It still has to pass through the House & Senate, then be signed off by Bush. That could take a few days or a few weeks, and the terms may change along the way. Another clarification: the proposal is to increase the conforming loan amount from $417,000 to 125% of each metro areas' median home price. The across the board $625,000 amount was erroneously reported (although that's likely what it would amount to for LA metro). The proposed change is temporary -- it may expire after 6 months or at the end of 2008.

Assuming it does become law, I assume it would increase mortgage applications and home buying interest in LA. A lot of people are currently on the sidelines because mortgages over $417,000 (i.e. most in LA) have higher interest rates than smaller loans (0.5 to 1.0% higher) -- corresponding to higher monthly payments. However, these borrowers still will need excellent credit to qualify for the loan amount. Also, the increased number of potential buyers COULD put upwards pressure on home prices in the area, putting a lot of homes out of reach for the very buyers Congress's proposal is intended to help.

My opinion is that downward pricing momentum is too strong, and will continue in LA even if the conforming loan standard is increased. Potential buyers will stay on the sidelines for at least another 3-6 months to watch prices go down further before jumping in.

[CaptHowdy]

sfvrealestate: "I want REAL WORLD reasons from you as to why this is NOT a good idea."

I hate to answer a question with a question, but... why should we taxpayers have to pay for Countrywide's disastrous lending policies? How does this discourage other corporations from trying similar scams in the future?

My question to you is... are you looking forward to paying for Mozillo's golden parachute?

Too bad. You are.

[Justin McCarthy]

That all depends.... But riddle me this Batman: Why can't we apply this economic "defibrillator" package every year INSTEAD of being in Iraq? GTLA.

[TakeFive]

sfvrealestate wrote:

"I want REAL WORLD reasons from you as to why this is NOT a good idea. ... Just real world reasons as to why this isn't helpful."

Simple. It's the fundamentals. Debt service to income ratios are too far out of balance - the reason many of these exotic loans were originated. The size of the bubble was at least partially boxed in by the current loan limits. Now you've increased the size of the box, providing more room for the bubble to grow, but what about income?

The fact is that too many people overpaid for too many homes and without near-term appreciation as a means of escape, these properties are destined to foreclosure.

The only difference is you, and not Angelo will be left holding the worthless paper.

[baruza]

Please correct me if I'm wrong (and I'm sure someone will), but doesn't this allow the banks to unload a bunch of their bad paper on the GSE? If so, there's your bailout... for Wall Street.

[l.a.guy]

"I want REAL WORLD reasons from you as to why this is NOT a good idea."

I'm actually not opposed to the increase so long as the GSE's confine the loans to conventional 30 year fixed mortgages and lend the money using sensible eligibility requirements. (i.e. good FICO's and at least 80% LTV)

I think the only real argument you could make against the increase limit is that it will perhaps keep prices a little higher for homes in the $500 to $750,000 range. (A $750,000 house with 20% down will now be eligible for a conforming loan) since a buyer may be wiling to pay a little more knowing that they'll make it up in form of lower interest.

I am curious what the rational is for not pegging the threshold for conforming loans to some sort of regional formula. I'm pretty sure there are a number of states where $417K is still quite adequate. I don't see why the GSEs need to be funding loans for McMansions in the mid west.

[mbob]

Hey People!

Are you smarter than a junior high student?

Do you remember the opening section of "The Man Without A Country?"

"....Poor little Nolan, all the big flies got away.....".

Substitute a few names. Game's the same.

[Justin McCarthy]

Baruza: No...Gov't backed loans don't like stated or toxic...They (FHA) will, however, allow 1 yr employment and 50% DTI with minimal assets, that's why this is a good move IMHO: It enables a smoother secondary (jumbo) loan market transition.

[wtf]

Here's a good overview about why this is a bad idea...we just gotta take our medicine...

http://www.doctorhousingbubble.com/
wrong-and-wronger-compounding-the-
mortgage-mess-with-bigger-mortgages/

[Justin McCarthy]

Stop spamming your site, WTF (what the F***?): This discussion is far too important....

[Cal]

http://tinyurl.com/yqwaht

I cant believe I am going to be paying for people like that to continue to be morons.

[Justin McCarthy]

Well Cal...I hope you knew that it was inevitable: Look at it this way-- it saves our economy, assets and dollar value in the cheapest way possible... Now all we have to worry about is inflation-- Hey, but that will BENEFIT the folks that own real estate...This is a good day for California.

[Cal]

Judy Graff,

The OFHEO (the people who regulate the GSEs) are opposed to the increase and they cite the many reasons why in their note:

http://tinyurl.com/ynolxe

The GSE dont have unlimited funds (in fact they are bumping up to their capital ratios) and their housing mission is affordable housing. 1 Jumbo can soak up enough capital that 3 other loans in affordable areas might not get made. There is geographic risk (one lender doesnt want too many loans in one place to mitigate the effects of a local economic downturn) as well as increased credit risk. And there is no guarantee of lower jumbo rates as GSE will have to compensate for these risks somehow.

I dont think it will have nearly the effect on sales that the realtors would lead us to believe (but they are grasping at straws). What it would do is cause the people who would go through the portfolio lenders (at higher rates) to just get a GSE loan instead and save money. The increased number of people who qualify with lower interest rates is marginal.

I'm actually all for the GSEs writing Jumbos to get that issue off the table for realtors as to why sales are slow and get their minds focused on the real reason staring them right in the face. If it wasnt for the tremendous risk it would introduce to a company with implied government backing (i.e. my tax dollars) i'd be for it 100%.

[cane]

"Dr Housing Bubble?"

What a classic hypocrite.

One of the site's advertisers is "Cash Free, Hands Free, Worry Free, Guaranteed Real Estate Investing!"

We gotta take our medicine, but you gotta pay the bills somehow, right?

[Cal]

Justin McCarthy: "This is a good day for California."

I think it is safe to say.. that remains to be seen.

[Kumar]

"But the underlying problems that ail the markets and the economy cannot be waved away by the Fed's magic wand"
Here is the article that best explains the economy mess
http://www.businessweek.com/magazine/content/
08_05/b4069000016691.htm

[JESS]

This another recipie for disaster! It has become so convinient for people to just Eff up and let the govt. clean your mess! we are digging another hole for the economy! Its not gonna help a big fraction of people. All those people who were counting on their homes to increase in equity will still be upside down. It wil help those people who could actually afford these "jumbo" mortgages. Its just gonna increase their affordability. As a matter of fact it might end up helping some genuine people sav etheir homes. But I think the problem will arise when banks will unload all those bad mortgages on Fannie Mae/Freddie Mac. It might prolong the agony but once Fannie MAe and freddie Mac get screwed, whats our next line of defense? It will dry up the credit market. All those genuine people who would need genuine credit will be unable buy houses! Shouldn't goal be return to normalicy. This whole situation will get even uglier and it will take the economy with it! I think we need a recession! Our economy needs some long term therapy not a band aid! I think we were number uno for so long cuz we had somethings that the others didn't. Let it be space technology, just technology in general or thge Internet! we are losing the edge! It's just not the credit crunch it is a lot more! We need to come up with something! we can trade with others! What kind of america are we leaving for our future generations! The message we are giving our next gens is that just rack up Credit card debt and ... wait for the "big corporations" to take the hit or let the feds rescue us! I think we need something that we can trade not just some inflated paper money! This is not an economy, this is a sham! I think bloated housing prices in California or else where would ahve been perfectly fine if the economy was moving along. If There was some unique industry(ies) that gave people ample money to spend! But thats not the case! Most of us work in service sector! trhis is self help! It doesn't pay of those big dividents that we need for maintaning this lifestyle! If weather wasd the only reson for a housing market, We should expect all those middle class people like myself to move out and let california be home to top 5% in our nation or the world! This is not gonna happen! Lets just be realistic not make it worse than what it is right now!

[arroyogrande]

"as to why this is NOT a good idea."

The current spread between conforming fixed and jumbo fixed is only 110 basis points anyway. It's not that you can't get jumbos, it's that you have to pay an extra percentage point to get them. Are you thinking that lowering the interest rate of loans between $415K and $625K by a percentage point (by putting the taxpayers on the hook for default through an implicit garantee) is going to save the market?

Are the GSEs (Fannie Mae and Freddy Mac) going to start taking in and guaranteeing stated income/liar loans? Option ARMs? I/O ARMs with teaser rates? If not, what percentage of recent )or current) buyers can qualify for loans on houses in the $500K - $1.5M range using the stricter lending guidelines? What percentage of recent home shoppers have *any* down payment, let alone 5%, 10%, 20%? What percentage of people with jumbo loans facing foreclosure have any equity in their house?

To summarize, the plan will barely make a dent on foreclosures and purchases, while putting taxpayers on the hook for the extra risk of guaranteeing loans up to close to 2/3 of a million dollars. Wow, who do I call to make sure congress rushes this through.

"Please skip the it's-our-tax-dollar reason, as my tax dollars already go to lots that I don't believe in."

What kind of silly statement is this? Your argument seems to be "we are already wasting taxpayer money, so don't complain about wasting still more"? Does this statement even sound sane to you?

- arroyogrande