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

[yourkillingmelarry]

Hmmm.....How many people can actually take out a $625K loan?? This will help a little. The underwriting on these loans are going to be strict. It will be good for people who can actually take out these loans, in reality there aren;t enough of them to turn the market around. People who have been following housing closely over the last two years knew this was coming so it is no big surprise. There is something very important to remember here, Once a bubble pops......it's Popped. Game over. That is where we are right now. Home prices will fall to the mean regardless of Fed actions and bailouts.

[Mary C.]

This is just terrible news. Is there any reason why the government wants to subsidize loans for higher-income people? If you can afford to buy a house that costs $600k plus, you can afford a higher interest rate, I'm sorry. It justs artificially inflates the price of all housing. Of course they're limiting it to a year only -- they can't sustain the backing for those high loans indefinitely. This is purely election year posturing that's putting a finger in the dike that will inevitably rupture. Why doesn't Washington and the business community just let things happen? Why are market forces only good when people benefit from them? Last I looked, capitalism has inherent risk. We didn't bail out the tech stock bubble, nor should we have. High share prices for home-delivered groceries and pet food were ridiculous to begin with, as are median home prices in California. You're just going to saddle some more suckers with home loans that will eventually wind them up underwater once the subsidies are gone for future homebuyers.

[srla]

So first the Fed dramatically lowers interest rates, then Washington attempts to re-inflate housing prices by assuming responsibility for ridiculously high mortgages. $650,000 is an absurd price for a house in any area with a median income under $200,000, and only a handful of cities nationwide have incomes that justify even a $600,000 median housing price (for example, the median income in Beverly Hills is around $120,000, and in Manhattan Beach, it's only around $110,000). So the government is, in essence, attempting to bolster housing prices that are already 10-15 times median income.

What is the point of this policy? To drive housing to 20, 25, 30 times median income? To make home ownership unattainable for the next generation? To create conditions where housing takes up 70, 80, or even 90% of take-home pay? And for this all to happen at a time when real income has been declining 1% per year for over half a decade?

The fact that any homeowner would be so greedy as to demand that the government continue to artificially engineer continued bubble growth at the expense of all renters and all young people entering the housing market positively disgusting.

The assertion that such policy is "good for California" is either ignorant or breathtakingly selfish. Over half of all residents of LA are renters, so perhaps a more accurate statement would be that it is a good day for homeowners at the expense of everyone else.

[Pat]

The banks just got a huge bail out and it is all under the radar. Bars, hookers, and restaurants in DC must have had a very good week.

[ray]

Cool idea.

Have Fannie Mae and Freddie Mac buy up the bad loans, then repackage the bad loans for sale to investors who will buy the loans since they are backed by the US gov and eventually the taxpayers will be left holding the bag!

"Privatize the profits and socialize the losses."

[Tombstone Realty]

I guess there's no point in hoping that members of Congress would try and stop this package....the American consumer isn't going to be helped by this. This is merely a way for the Banks to get rid of their bad loans (or so they hope), while the Congress throws dollar bills into the crowd to distract them from what's going on.

This is merely "whistling past the graveyard" by the government.

Unfortunately, this particular graveyard has got zombies. And they're hungry.

[bode]

Just so everyone is clear, here are the largest originators of Jumbo mortgages in the US:

http://data.nationalmortgagenews.com/
freedata/?what=jumorig

You'll notice that Countrywide is not number one on any of the lists. Although this will of course help Countrywide, it will also help many other banks (sorry, can't help myself when people pile on CFC for no good reason! ;)

Arroyogrande is 100% correct -- the GSEs will not be making any foolish loans, and they will not be purchasing loans that should never have been made. WM, CFC, etc will not be able to unload their toxic mortgages onto the GSEs. Although they're a hybrid government/public company they cannot drive themselves into the ground. The net result of this is that people with good credit and reasonable income will be able to refinance, which isn't going to help that many people. It may help out a bit, but like many have said, why is it at all surprising that there is a spread between conforming and jumbo loan rates? There is additional downside risk, and so it seems perfectly reasonable to me.

[abbytherabbit]

I'm a seller and I don't think this is a good idea. It might help me sell my house now but god help me on the next purchase. De-listing today!!!!

[Mike]

At the end of the day it always has been and always will be supply and demand that dictates the price of a commodity. What I don't understand is why everyone keeps referring to the median income of LA and comparing it to the housing prices; one actually has little to do with the other. What you should be looking at is the median income of people who are actually looking to BUY a home and comparing that to prices. In fact, most people in Los Angeles and Santa Monica couldn't afford to rent their apartment at current market rent so it doesn't surprise me that aren't able to buy a home at market prices. Currently, the market rent of a two bedroom apartment north of Wilshire in Santa Monica is about $2,500 a month; very few current renters could afford that price but lucky for them they are under rent control. However, obviously the people who are currently looking to live in Santa Monica can afford it just fine b/c thy are quickly swept up. If you can afford $2,500 a month in rent, then you can afford a loan of about $500,000 (especially with the conforming going up). This whole median income of the area compared to home prices idea doesn't make sense in high demand areas! Yes, most homeowners couldn't afford to buy the house they live in now but at the same time most RENTERS couldn't afford to rent their apartment at market rents! This is nothing new!!! Home prices went from about $26,000 to $80,000 during the 70s, a bigger gain than we witness during the '03-'07 run. The fact is you need to look at what a monthly payment on a mortgage costs and compare that to market rent; then you will see where home prices should be. Market rent for a 2 bedroom is $2,000; then a two bedroom condo can't go for less than $400,000...why because it's the smae cost and why would you rent it when you can buy it!

[Mike]

One more point to follow on that :) When you draw in the median income of an entire area you are counting people who are not in the market to buy; it's faulty statistics. Do a sample of people going to the open houses on a Sunday and check their income. I promise you the people shopping in Beverly Hills now are not at the $120K a year figure! In fact, it's not surprising that the median level is so low there b/c so many people bought a long time ago and stayed! But when they bought 120K a year was worth a lot more than it is now. Look, according to the census over 10% of households make over $320,000 a year; the question is where do they want to live. Your answer explains why New york went up 7% in '07 and the Westside has been doing just fine during this whole mess.

[Justin McCarthy]

Yes....Does remain to be seen, but this, I think, is the most solid and reasonable thing that can be done here to make a smooth transition for Cali and high cost area homeowners.
Also, FHA does their own appraisals, getting rid of another part of the toxic loan problem: Inflated appraisals...GTLA.

[Justin McCarthy]

To yourkillingmelarry: "How many people could take out a $625k loan?"....Hmmm, lets see: On a 30 year fixed (now at 5.5% since the overnight rate has been lowered) and a 50% DTI per FHA, and assuming a 1.2% tax rate....Just about any couple making over $100-120k per year...Assuming no egregious credit or car debt....Sounds like a lot of folks you know, eh?

[Mike]

Not sure where you guys live, but I know quite a lot of couple where each person is making at least 60K a year. In fact, I know quite a lot of couple where each person is making about 90K a year. Let's see; starting salary of LAUSD teacher is 48K a year; which mean two brand new teacher are earning...oh my; 96K a year. And if they teacher for 3 years...they're at over 100K a year. That's two teachers! What about two pople below the line in the industry making 50K. I don't know if this is some sort of generational divide, but all the couple I know are two income earning people making at least 50K a year each. 100K a year is by now means anything special, but like a said, maybe this is why the Westside is holding up just fine.

[joe shmoe]

Mike

You are right that regional median income is not relevant to the SM market, but then the same is true of regional house prices. The median house price in LA is what? about $500K (sorry forgot the latest figures) and for SM, is what? about $1 million?

Affordability is a key metric, and it must be figured by relating price to income and access to a downpayment.......and relating that to the standards of lending and current rates.

Put it all together and the equation spells..... a sinking market and falling prices.

Median income vs median home prices gives us a decent sense of the future, despite its imperfection across geography.

Joe

[MyLessThanPrimeBeef]

This is how I see the whole thing:

Serial bubbblists are running the world. You might know one of them, Alan Greedspan, aka Mr. Bubbles.

Debt addicts, well, they have a co-depency problem with the serial bubblists. Some anarchists on this board are advoating free, legalized debt or debt relief. Typically, these debt addicts also are financial abusers who themselves might have been abused financially when they were young.

And our freedom is being threatened by the evil, terrorizing geniuses who have been builiding mass weapons of wealth destruction (MWWD or MWsquareD which being squared, is more lethal than MWD) on secret locations on Wall Street but refuse Level III toxic assset inspection by ordinary decent people.

Does the story seem familiar? Except this time it's true.

Willing people need to form a coalition and do something about this!

[Theorist]

Here's what's really going on:

If you haven't heard by now, we were again visited by aliens, this time in Stephenville, Texas. We saw aliens spacecraft frequently while we developed and built up nuclear weapons, but their interest waned as they saw we weren't nuking each other yet. Interest apparently picked up as the fallout from the MWWD's began drifting around the world. They probably picked Stephenville as it is among the few towns to suffer negligible damage; the aliens focused on that town to see why. It would be interesting to look up how many foreclosures they've had and how stable prices have been over the years there.

Plus, the aliens probably understand they must watch us carefully. If we are to enter into the intergalactic economy, they probably don't want us bringing our earthbound financial weapons with us. That's actually not a bad idea... instead of selling toxic products to ourselves, why not foist them on some unsuspecting, innocent civilization on another planet.

I'm poking fun at ufo nuts, but with a little guilt. At the age of 10, I was at a summer camp in Lake of the Woods, Ontario. There were about 300 of us all gathered around a large campfire out in the middle of nowhere. Every single one of us saw 15-20 blobs of light come gliding in together and hover what looked like less than a mile away, over the lake. They remained motionless for a number of minutes, and then... slow acceleration... then off like a shot, faster than any aircraft could fly. (I think I saw Warren Buffett piloting the lead craft).