The new 'junior jumbo' loans, and why they won't be temporary

Good morning. Countrywide Financial is leading the cheers this morning for the new "junior jumbo" mortgage loan limits. "It's the single most effective step they could take to stabilize the housing and mortgage market," said Countrywide spokesman Rick Simon.

The details: Simon was praising the stimulus deal cut by the administration and Congress, which would include "...a significant increase in the maximum loan limits for the Federal Housing Administration and quasi-governmental secondary mortgage operations best known as Fannie Mae and Freddie Mac."

More, from LATimes.com: "The precise hike in loan limits was still being debated late Thursday. House Republicans said they had agreed to temporarily raise the limit for Fannie Mae and Freddie Mac loans to $625,500, although Democrats were proclaiming that the deal would hike limits to $729,750.  Either way, the increased limit on loans guaranteed by Fannie Mae and Freddie Mac would be temporary, expiring Dec. 31 of this year."

Why it's such a big deal, and such a boost for homeowners, in California: The move would likely mean lower interest rates on loans in the $417,000 to $729,000 range (which I'll now call "junior jumbo" loans). That would help buyers in that price range, and owners in that price range who are looking to refinance into fixed-rate loans. Maybe more important, it helps lenders like Countrywide find a willing buyer for their junior jumbos. Win, win, win for those folks.

The arguments against higher limits: They would newly expose Freddie and Fannie -- and ultimately taxpayers -- to some of the least stable housing markets in America, which are the expensive ones. As Mike P said here yesterday, "In other words, taxpayers all across the country are now on the hook for California-sized mortgages. I bet they're thrilled." Also: As Cal points our here, Fannie and Freddy's limited capital "will be soaked up by California (and other parts of the country) Jumbos, leaving a lot less for everyone else."  In other words, explain to someone in Cleveland why the government should back one big California mortgage instead of three normal-sized Ohio mortgages.

Why it won't be temporary: Because on Dec. 31, 2008, it says here, the housing market in California and other bubble markets will still be weak. The lame-duck Congress will have a choice: let the junior jumbos expire, which would hurt already weak markets, or extend the junior jumbos. Congress, lame or otherwise, rarely crosses the financial industry. The junior jumbos will survive.

Why the Bush administration rolled over on this issue: Its opposition to higher loan limits for Fannie Mae and Freddie Mac is well known. From NYTimes.com: Treasury Secretary Paulson, at a news conference, acknowledged that he was not happy about the higher limits. “I got run down by a bipartisan steamroller,” he said. “Republicans and Democrats reunited on this.”

Your thoughts? Insights? Anybody out there believe these higher limits would be temporary?  E-mail story tips to peter.viles@latimes.com.

Comments

[adrian]

What's the deal on having a lower rate, if buyers have to prove they can afford to pay the mortgage?
Still, there is a big gap between price and income and, with the banks reluctant to lend money as easily as before, I don't think it'll make a difference.
I am sorry for NAR and Countrywide, but I still hold tight on my 200K for down payment, waiting for prices to come down for another few months.

[JW]

Here, my wife and I sit in our fully paid for home. We have always been responsible people who paid their bills and have never even paid an electric bill late. We are shaking our heads in disbelief because the money that we have saved is being devalued by these idiots in Congress. Let me get this straight: Fools who bought homes that they couldn't afford are going to get another bite of the apple and the government is going to back the mortgages so when they default, the responsible taxpayers take it in the shorts. Add this to all of these idiotic, rate cuts which along with the huge number of foreclosed homes have driven away investors in good ole Uncle Sam and made our $$$$$ worth a whole lot less. I am sick and tired of these %**&@^#% politicians getting involved in the free markets. What a bunch of morons. (in case you can't tell, I'm pissed)

[Nathan]

The found a bailout in disguise that's palatable to the general public.

[greg o]

More rewarding the masses for not being responsible.

[sigh]

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

EXACTLY. So here's your government bailout of all the lying cheating stealing fraudulent bastards on Wall Street, lenders, and everyone else who caused this fleecing of America. Let's just send the bill to the government! Woohoo! SIGH.... I'm moving to Canada.

[Jeremy R]

"there would be a significant one-year increase in the size of mortgages that could be backed by the government. "

One year eh. I will believe it when I see it. Its more like a permanent increase!

Housing bubble transfers into a credit bubble transfers into a government bubble.

The government better be very carefull while exposing itself by insuring much riskier loans.

Maybe I am confused, or maybe I am just making this up, but if the government gets into huge trouble they will either expand the national debt, or they will cause huge inflation. More over, the value of the dollar drops, the price of imports skyrockets, and the credit crisis deepens.

Cant we just encourage buiilders to go rental on their condo projects? Then all of the people who go under water because of a huge housing correction can have a large supply of affordable rentals to choose from.

After this whole thing blows over, the rentals can be condo converted back, we will still have an ample AFFORDABLE housing supply for our population, assuming we outlaw bad lending.

This sounds better than manipulating global credit markets, increasing exposure to falling assets, etc.

We need to think long term people. We dont want to end up like Tokyo circa 1988-2002

[Theron]

I realize this is another case of "moral hazard" but is it so bad? Don't conforming mortgages have to meet much more conservative qualification criteria? So your exploding ARM borrower with -5% equity still won't qualify.

[SurferNate]

My concern is the FHAsecure proposal becoming permanent...The GSEs liquidity will be trapped eventually. But allow the FHA program to have 97% LTV at $700K plus will become the biggest taxpayer bailout. Has anyone have an update on the tax re-allocation for the banks, hb, ib that has been proposed with this stimulus? It definitely raises the actual price tag substantially. Will the banks even lend the refund? Doubt it...since it is a solvency issue for them now....

[Cal]

Since it is buried in a stimulus bill it might pass, on its own and given full consideration, no way the Senate passes this. The vote would be 45-5.

Why it will probably stay (even though the Democrats "promised" not to try to extend it).. the new democrat President will be sworn in on January 20th and they will definitely keep it.

The OFHEO director is worried. The person in charge of worrying about the GSEs thinks its a really bad idea. Which pretty much guarantees he will be replaced by someone who thinks its a great idea and wont make waves.

[Jenna]

Maybe I don't understand what is going on, but this doesn't sound so bad. People will still walk away from their homes if they are severely upside. Their houses will have to be sold at lower rates since the easy money has dried up. People like me who have been saving and have 20% to put down get to take advantage of a better rate while still adhering to the stricter rules. Am I wrong?

[Andrewy]

I am pissed off about this increase in jumbo loan limits. I am from the bay area and have an increase like this will only fuel costs to remain high. What we need is a price correction so that more people can afford housing, insteard what this does is let people who could not afford the house they are living in to cling on linger and also to aid people who can't afford a house to think about buying again!

[Paul Hiller]

Raising the limits will have less impact than many think. Countrywide just put almost all of California in a "declining value" box. It means that all their programs just got cut back 5% loan to value. Nearly all of the borrowers in the most trouble are from 04' on , and most were highly leveraged to begin with. Underwriters are being encouraged to actually underwrite, so the few "stated" programs left are under a microscope. That only leaves the people who actually make good money and still have plenty of equity, eligible for a refi. Put the party hats away. Whatever punch is being served is very weak.

[BigD]

This is going to help our real estate market in California. The neiborhood I live in will definately be affected - mostly $700k to $1.5 million homes. It will lower interest payments for many people. Many more people will be able to qualify for beter interest rates. Come on people, this is good thing!

[brettdl]

Here's the press release that Cal is referring to:

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.

Yesterday Chairman Dodd talked about moving a GSE reform bill early this year. We are ready to work with him and the Senate Banking Committee. We will also be working with Fannie Mae and Freddie Mac to ensure that any increase in the conforming loan limit moves through their rigorous new product approval process quickly and has appropriate risk management policies and capital in place.

[mike]

i want a new fannie may mortgage. i'm going to use this to my benefit instead of complaining about it. i'll have my new mortgage fall on the backs of the whole country. why not.

[Michael Snyder]

Once again the devil is in the details. To allow increased limits for loans going forward and employing prudent underwriting standards might be construed as an appropriate market adjustment. Providing a government/taxpayer funded dumping ground for mortgage investor's "untraceable paper" is a bad idea and probably the net goal of this "stimulus plan". We're down to a little bread for the masses who will spend it on goods manufactured in China and the circus/Wall St.will dump their bad paper on our children.
At this posting the Dow is down triple digits as the euphoria from the Fed's emergency action wears off in less than two days. If the expected half point cut happens next week we'll see another bounce probably followed by more "correction". It seems interest rate cuts and government bail outs are the crack cocaine of the financial markets.
As for temporary? Sure; just like our presence in Iraq was temporary after "mission accomplished."

[Michael Snyder]

Talk about details! While listening to CNBC i heard a commentary on a tax "adjustment" included in the "stimulus package" before the Senate. The provision allows for losses in the last year to be applied to the gains of the last five years. Ann should do the math on that one just for Countrywide. How about WaMu or Wells Fargo? Angry yet?
Kinda makes that $300 to $600 cheque look a bit pathetic.

[CD]

Warning PETER,This is completely off subject, but I see today in the LA Times real estate section that you wrote an article on a prefabulous Marmol's desert house in Desert Hot Spring for 1.85 million. agent is Crosby Doe.
Peter ,are you aware that Desert Hot Spring is the dumping ground for all convicted felons?
Please read the article in The desert sun today. : mydesert.com re :will the State continue dumping parolees in Desert hot spring?
Desert Hot Springs has become a very very dangerous place to live anyone familiar with the Coachella Valley will testify to that. Please read the article , you may as well advertise for someone to live in Compton for 1.85 millions. That prefabulous house should be deprefabricated and moved the hell out of there. The agent Crosby had another Neutra home they wanted a fortune for next to a Cristal meth lab also in Desert Hot Springs. This is strange advertising for a very dangerous place.Don't lose your credibility over an architectural home that has been for sale now for a very long time, that no one in their right mind would buy because of the danger involve in that area.This is a very bad bad place. Check the Desert Sun and tell me if you want to move there...

[IM]

Let's face reality. When our parents bought homes 30 years ago, the ratio of house value to annual income was probaly 2:1. Today it is anywhere between 5:1 and 12:1! Housing assets have been inflated for decades. As rates rose, sub-prime, home equity and prime mortgage rates rose. Those holdling the first two categories of loans could no longer afford them. Result = default. Those defaults are critical to deter what, historically, has been superinflation in housing prices. Our economy depended on that superinflation RELATIVE to other products and services because it created the wealth effect (using home equity lines, etc.). But the foundation of the economy...the EMPLOYMENT SECTOR was not living up that superinflation. Incomes weren't rising anywhere near as fast as housing. So the equity in people's homes was supporting the economy and now the doo doo has hit the doorknob. The best thing for this economy is a SLOW decline in housing prices back to equilibrium. Raising these limits only perpetuates the problem (and I'm a potential buyer in this category). It would help maintain the price of housing when in reality, the best thing for the economy is a steady, gradual drop in the price of housing.

[LeavinLA]

To all of you who are crying about this because you want prices to crash, get over yourselves. Make more money or move somewhere else. No one owes you a house. If you can afford the mortgage, you can buy a house. You're acting as entitled as you accuse those you want to disembowel for overreaching with subprimes of being.

[Chris Pepper]

THis has not been signed into law. People are already saying this isn't going to fly. You have every right to write your congressman or senator and let them know how you feel about this. Call there office. They do listen to their constituents.

[Cal]

LeavinLA: "No one owes you a house."

Funny, that is just what many of these people who bought are getting, a house and a bailout.

[MyLessThanPrimeBeef]

Freddie Mac down 7.6% and Fannie Mae down 7% - that's the business we have chosen, Michael. It's just business.

[Cal]

http://tinyurl.com/27aq9t

"Stimulus plan may lead to higher mortgage rates "

"Increasing the eligible loans to $729,750 from $417,000 would change the characteristics of mortgage-backed securities, leading traders to exact a premium for increased interest-rate risk."

It's almost as if the OFHEO knew exactly wtf they were talking about (see earlier note from ofheo).

[IM]

LeavinLA - I haven't noticed anyone indicating they are "entitled" to a house. They just don't seem to want to stupidly overpay for one. I hope you could agree that inflation in general (and in particular when not matched with wage-push inflation) has a negative impact on the economy. You only have to reach back to Jimmy Carter's legacy to realize that.

I haven't seen anyone say they are "owed" a house. What I see are intelligent people who don't want to overpay for a house.

But then again, LeavinLA, we could all just uproot ourselves and move to the middle of the country like you.