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

[WC Mortgage]

This stimulus package accomplishes nothing. If you have the ability to document your income, there are plenty of lenders that can get you fixed Jumbos in the 5's. If you can't find one then fire your broker and get someone who knows what they are doing.

The fact of the matter is that most people who obtained Jumbo mortgages did so on a stated income program, and those programs are now restricted to higher FICOs, lower loan-to-values and primarily self-employed borrowers. How does this "stimulus package" help? You're right...it doesn't.

Those of you who think this means better rates for people are in for a rude awakening. Fannie/Freddie have already instituted a risk-based pricing system that increases rates and pricing for people with higher LTV's and FICOs. Does anyone here really believe that there won't be a pricing adjustment for these higher loan amount exceptions?

Moreover, the indexes that most of these ARM's are tied to have fallen so much lately that the next adjustment period for homeowners may see a number of payments actually stay the same or even go down! Too little, too late.

At least the photo-ops will make great election year commercials.

[arroyogrande]

Something to think about...the law of unintended consequences in regards to raising the conforming loan rate:

Reuters
Stimulus plan may lead to higher mortgage rates
http://tinyurl.com/2jr98z

"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...

"When you start throwing a lot of jumbos into a pool you spoil the fungibility of the collateral," said Linda Lowell, a mortgage market veteran and principal of Offstreet Research LLC. "That has made the market as liquid as it is. Home owners have benefited from lower mortgage rates."

- arroyogrande

- arroyogrande

[LeavinLA]

IM: Most of the posts on this blog carry a huge sense of entitlement. "I saved and saved, but I can't buy a house! It's my RIGHT!" "Anyone with a subprime loan should die so prices will crash and I can buy the house I deserve on the beach, because I was smart enough not to get into the market!" etc. That's all entitlement thinking.

And I didn't move to the middle of the country. I moved to an area with beaches... and real estate value appreciation.

[JohnnyB]

Excerpt from a CNN-Money article today… by Les Christie

Les writes… “For instance, the interest rate difference between loans that fall within the cap limit and jumbo loans was more than 1 percent on Thursday -- 6.39 percent compared with 5.30 percent, according to Bankrate.com...”

"The 1 percent drop is a huge factor," said Yun. "In California, it could create a mini-boom."

Well, we all know, love and respect the credible Yun-meister from the trustworthy NAR. If he’s for it, it must be good for us Californians.

Another California housing “boom” sounds like just the ticket.

[yourkillingmelarry]

This is too funny, here is Calculated Risk take.

http://tinyurl.com/32rtuo

"TBA works the way it does precisely because "agency" loans are basically interchangeable: the normal variation just isn't wide enough to prevent traders from pricing deals before seeing the exact loan composition.

Certainly this problem can be solved by putting the LFKAJ* in their own pools--as with FHASecure. That might keep this plan from driving up rates for everybody, but it's not clear to me how it improves the spread on those LFKAJ-only pools. Hmmm.

*Loans Formerly Known as Jumbo"

Loans Formerly Known as jumbo, that's hilarious. All this fuss and nothing really changed, the LFKAJ's will have to have higher rates to themselves or all mortgages will have to have higher rates. Do you think somebody could have picked up the phone and asked the traders what they thought about this??

[Jason]

I have been waiting and saving money for years waiting for a correction in the market. I have an income of $100K per year and I would struggle with a California mortgage. I don't see how the average person with a 60-80k income can get a loan for $500+ and live a good life. Has anyone seen the credit card debt of the 1+ Trillion dollars. Americans don't have a concept of person finance. They want to spend print more money spend more and then has someone else pay for the damage.

[Cal]

http://tinyurl.com/2geqpx

"Fannie and Freddie loan limit growth could run into opposition in Senate"

"Sen. Richard Shelby of Alabama, the senior Republican on the Senate Banking Committee, agreed. Raising the loan limits without stronger regulation "enables thinly capitalized entities with recent accounting problems to provide a high-risk benefit to the wealthiest Americans without any real consideration of the need to do so or of the risks it presents to the taxpayer," Shelby spokesman Jonathan Graffeo said in an e-mail."

It aint over. At least some of the Senators from the non-bubble states realize the underlying issues.

[Mary C.]

All of the posters who complain about people feeling "entitled" to buy a house via falling prices -- how is that different than feeling entitled to shored-up real estate values via government-subsidized low interest rates? I was always under the impression that government-backed mortgages were to help the middle class get into home ownership. If your income is high enough to afford a mortgage on a 600-700K house, you are an upper-income family/person. If that's the case, why not just have the government back mortgages up to $1 million or 10 million? This is just such a bad idea. It exposes the government to trillions and trillions more in risk. Everyone will pay. If you make enough money to afford and expensive home, then you can and should pay the interest rates for it. The interest rates on jumbo loans are not that bad, only a point more or so than non-jumbos (and everything I've read indicates the rates and availablity have increased since the jumbo problem first cropped up). If your credit is great, you should have no problem getting and affording a jumbo mortgage under existing, non-government programs. The fact that people can't is more a reflection of the fact that loans were made with bad underwriting standards before, and aren't now. Getting the government into it may not change the situation much, because they have strict lending standards, too. But a few people that are in good financial positions and have very high incomes will get subsidized interest rates, and that's just wrong. Plus, it will slow down the price decline, which is a bad thing. They will go down no matter what; it's probably better to get it out of the way as soon as possible, then prices can eventually stabilize once supply starts to get sold off at the lower prices.

[ShameandScandal]

Picking up on the announcement from the OFHEO Director (read: Bush, Paulson), who goes on record to say the junior jumbo political 'bandaid' is a bad idea without some really serious thinking about things ---

I'm no fan of BushWorld, so don't shoot me as an ideological messenger here. But let's consider for a moment that, at some high level, real grown-ups are imagining a potentially serious infection that could creep into Fannie and Freddie in a moment of unbridled legislative passion. In the name of 'preserving the American Dream,' it would not be the first time this sort of accident has happened in the history of this country. Yes, I'm shocked too, but we must grieve and grow.

Fannie-Freddie form the spine of a complex $11 trillion (a rough estimate of current U.S. mortgages) economic-financial structure, not to mention the additional mega-trillions in hedges and derivatives linked to same. For those not facile with imagining the magnitude, it's important to pay way more attention to the t-word than the seductively small '11' word. After trillion comes quadrillion, I looked it up.

Even if legislative language is crafted that could be interpreted to mean 'small' or 'temporary' by reasonable people like you and me, experience teaches us that these terms have no meaning to finance/bank companies who hire way-smart lawyers and lobbyists, or to federal bureaucrats, who also thrive on turning legislative nano-cracks into massive canyons. They also share a teaching mission to the economics- illiterate, see next paragraph re the Congress. BTW, way-smart lawyers and lobbyists like expensive shiny suits and shiny shoes, I don't know why, maybe some kind of Ken and Barbie thing.

Let's set aside the Mazillo turd for the moment. Yes, stinky and icky, but he's not a flight risk anyway, and truly small potatoes in the overall scheme of things. Tabloid filler. The scandalous complacency of the Congress and the federal agencies, too, is a matter for another day (meanwhile, go to www.house.gov and www.senate.gov, get their phone numbers and email addresses and share your views directly. If they do answer your email, they will probably try the lame 'no one could see this coming' excuse, so be prepared for that one.)

No, the stakes are much higher in a few years. If history holds true for median residential real estate values as a multiple of median household income, prices need to decline another 25-30% in the western U.S. My imagination wanders to the coming days when world financial markets, and (what's left of) the big banks, and their traders, might start to get a whiff of this, and mingle that whiff with an idea that Fan-Fred products, containing an architecture that tries to put any kind of artificial flooring under this powerful historical trend, can't be trusted like in those good old days of that 'shining city on a hill.' Or, median household incomes don't go up by 20% across the board in a month in order to allow for the historical multiple to return (don't give the Congress any more nutty ideas). Real simple research, go to the Census Bureau on the Internet, find the numbers, and put them in a spreadsheet, presto. I imagine that the grown-ups are looking at some stuff like this, with lots of extra details and maps and charts and stuff, probably on shiny paper.

So, where am I going with this ? What I'm imagining on a chilly Friday night, is that a real good test might be coming for Mr. Market to describe a much more breathtaking impression of how far 'down' might be, which could impress even potential lenders of last resort, some of whom President Bush just visited. Maybe you saw the photos of him standing in front of a tent in a desert a couple weeks ago. Not only some bigger trembles from Mr. Market, consider the possibility of a more-than-chiropractic adjustment in a few years in the values associated with the term 'full faith and credit of the United States of America.' I am having dreams about scary roller coasters these days. Say, can you see ?

Have a great weekend, everybody, and thanks to the LA Times for keeping free speech alive during these dark days.

[Ann]

This is a 'whatever' proposal because of two abbrevations:

DTI - debt to income which means the borrower will have to conform to the Freddie, Fannie and and FHA quidelines of maximum 31% of gross income going to mortgage AND taxes AND insurance; plus not more than 41% of gross income to fixed debt (house plus credit cards plus car etc)

LTV - amount of the loan to the value. This means downpayments. Freddie and Fannie have booted the required downpayment in 'distressed' markets - and that includes CA. If the prior downpayment was 0, they now want 5% (and fat chance on getting that!). If it would have been 5%, they want 10%; 10%, they watn 15%; 15%, they want 20%........

Also Freddie and Fannie buy very very very few ARMs as compared to the number of fixed - and if if is an ARM, the borrower has to qulaify so that the maxiumum payment is not more than that 31%/41$ DTI.

So how many prospective buyers can really come up with:

(1) 10 -25% down payments

(2) meet the income to debt ratios for those size loans

Answer will probably be no more of them than there were in '03-05 which is still only about 25-26% of borrowers. (OFHEO data on the type of jumbo loans extant.)

They want to refi? Still have to meet the DTI ratios and the house will have to appraise to meet the LTV requirements (and in a falling market, that sould very easily mean bringing cash to the table and the odds of them having the cash are?)

So, it is really kind of meaningless.

[Nick]

I live in the California (Bay Area) and our total annual income is 210K. We just bought our first house last year. Its pretty small (1600sq feet) but had to pay 750K for it. We put 22% down. Ours is a jumbo loan where there interest rate is 5.75%, but with the stimulus package I should be able to refinance for less than 5% just like the "responsible" people living in the rest of the country who have conforming mortgages because housing is not expensive. And I am really happy about it. Hope no one should have a problem with that. Right?

[reena]

To Mary C.

Then why not lower the conforming loan limit to 117K from 417K to expose the government to even lower risk?

You can easily get houses for that price in many states. Why is 417K such a "magic number"?

[Fan]

It is about the bank/financial system the government is trying to save, it is not about the individual house owner, stupid!!! Who cares who buying what house in what prices. The more you buy or borrow, the better for the bank and financial institutes as long as your credit is checked and approved.

[cane]

Interesting discussion - really highlights that people will ignore facts for their own self interest. The huge increase in housing costs in most markets (or the bubble, whatever you want to call it) has clearly been demonstrated to be a function of, in order of significance, a) lax lending practices, b) fraud, and c) supply and demand. A and B are for the most part gone, since lenders have finally awakened from their stupidity. The increase in limits in SOME areas (LA, SF, NYC) will be coupled with much more intensive and restrictive analyses of borrowers’ ability to meet their obligations. However C - supply and demand - will now be the primary vehicle to determine real estate value, as is always should be. No one in the more expensive areas will be getting any kind of free ride here. Prices will continue to fall in these areas if they were artificially propped up by A or B. If they don’t (due to supply and demand now taking a front seat), then buyers in the more highly sought after metro areas will no longer have to pay a financing premium for some mortgages - this is not unfair nor the end of the world. What is unfair is to set an arbitrary number like $417k across the entire US, as if values in Cincinnati are tied in any way to values in West Hollywood. That said this is clearly a hidden bailout for many buyers who over extended and the financial institutions that allowed it to happen - they screwed up royally and are now being given a lifeline. I don't think they deserve it at all, but the downside risk of not doing so is much more scary than most people here are acknowledging. It's not just a matter of allowing real estate to free fall to a point where renters priced out of the market to now afford a home; unfortunately all this crazy lax financing is intertwined, and the fallout could spread (actually, it is already...) like a virus to the whole economy, affecting jobs from top to bottom. Be careful what you ask for, you just might get it, and it might hurt you a lot more than you think.

[jdj]

'Stimulus plan may lead to higher mortgage rates'
http://news.yahoo.com/s/nm/20080125/bs_nm/
usa_mortgages_bonds_jumbo_dc_1;_ylt=Aj0PzGJ0XzTq
LlCQ3d9e5SUG1vAI

[kcnativnla]

The median income for LA is $61k. The median house is $600k. Do the math. No matter what type of creative financing the government comes up with, the truth remains the same; housing is not affordable in LA. I don't know anybody who says they are "owed" a house, but if they got rid of everybody here who can't afford the house they're living it, California would be a very lonely place. That's sad. I'm waiting to snatch up a home...a HOME as soon as prices are realistic. However, deals like this "stimulus" package will continue to artificially inflate the market, inviting speculators and idiots, and push out responsible potential home owners like me and my wife. Just because these fools are willing to pay 70% of their income on a home, doesn't make that the smart thing to do! It's sad and unfortunate, but those people need to pay the price for their irresponsible behavior.

We've circled November, 2010 on our calendar. Either it gets better by then, or we're moving. We might as well start packing now, if the government is going to pass bailouts like this!

[Drew]

This will help us later in '08, we plan to buy in the $600-700k range w/20% down, now we can save a bit on the interest rate because the entire mortgage balance will be conforming. Woo-hoo!

[jimmythetrucker]

The "junior jumbo" raise was predictable based on past behavior of this administration, which has always put politics ahead of patriotism. They're willing to do anything, they'll gladly wreck the country if what they do keeps the roof from falling on George W. Bush. If Bush was a man, he would take responsibility for the mess he has made. But Bush is not a man, so he will instead drop the whole load of manure on the next administration.

[PR]

Putting aside whether the increase will have more unintended effects than intended, why shouldn't a proportionate share of California home owners have the benefit of a program funded by all taxpayers? Enough tax dollars are taken out of this state and distributed to less populous states who nevertheless get their two Senators, or to ethanol farmers in early-voting Iowa. Why should 3 Ohio homeowners benefit at the expense of one in CA? We are penalized enough by high costs of living, limits on deductions through the phase-out, the AMT etc etc. Why on earth should we feel one iota of guilt about this?

[Michael Snyder]

yourkillinme larry,
Why do I find such striking similarities between this "stimulus plan" and the wardrobe belonging to "the artist formerly known as prince"?
Ann
I'm actually curious about the potential ramifications of the five year loss amortization allowed in arrears by this bailout. It seems like we, the taxpayers are about to write huge tax refund cheques to these corporations to cover their losses on their subprime CDOs.

[Ken]

I don't see how this should bother anyone. I have a 500k mortgage on a 700k house because real estate prices went up dramatically and I need to be in a town with a good school system for my growing family. I make close to 200k and own my own business. Why should I pay a higher rate than a guy with a 400k mortgage. Who does this hurt. It seems to me it only hurts those who are "praying" for homes to become more "realistically" priced. What is realistic?

[Cal]

PR: "why shouldn't a proportionate share of California home owners have the benefit of a program funded by all taxpayers?"

14.35% of conforming loans purchased by the GSEs in the first 6 months of 2007 were made in California (proof in the URL at the end of the post).

And with a Ca population of 36 million and a US of 299 million, meaning we are 12% of the US population it seems like we already get our fair share.

The issue is both the purpose of the GSEs and the risk involved to them. I dont think it would do anything other than soak up mortgage money from the affordable parts of both the US and California in particular. This will cause rates to rise and sales to slow. It is for this reason that I am for the GSEs getting involved (my personal selfishness). But the systemic risk is very high, it is akin of saying we could make more energy with a nuclear power plant if we ran the plant in a slightly unsafe manner. Yes you can do it and the risk is manageable but a small risk of it all blowing up should be more than we are willing to take.

The GSE involvement in Jumbo would make a small non-zero difference in California but it won't be nearly the panacea that realtors are hoping for. For any of the high loan to value loans you have PMI companies on the hook for the difference over 80% and they are becoming much more risk adverse. Which means to joe sixpack, higher insurance premiums if they even qualify at all.

http://tinyurl.com/ynolxe

[Laker]

Posted by: Ken "homes to become more "realistically" priced. What is realistic?"
Ken, Realistic is that people could afford their houses long ru, aka for more than 3 years...
People that can get 30 year fixed and the mortgage will be less than 50% of what they take home income. Since median household income in LA is about 60K, we can assume that not all are potential buyers so say income of 100K homes is potential median. Make it times 3 to get $300,000 as the median house in LA. Today it is in the $480,000 so you can see that we have some time/distance to go...

[curious1]

Correct me if I'm wrong, but didn't falling interest rates enable people to afford "more house for their money." Isn't that what people were encouraged to do by RE professionals: buy a higher priced house because interest rates were low? And isn't that what--in part--caused housing prices to increase so dramatically? So, wouldn't the same hold true for the jumbo loans? If the new conforming limits are imposes, people that bought these jumbo houses will not only be able to refinance them for a new lower interest rates, they'll also be able to sell them for a higher price because the interest rate for their potential buyer will be factored into the price? Won't this lead to more increases in prices in the future for already expensive homes?

[Sportskid1]

I completely agree with this increase. I have worked my butt off to buy my first house in a good neighborhood in LA and this puts me in the jumbo loan catagory. I put down a good down payment, have excelent credit, and can fully afford my house. Why should I have to pay an extra 1.25% in interest (currently) just cause my house is more expensive. Am I at a higher risk than some guy in Texas with a 200K house just barly making it month to month. This limit is a joke. What the lenders need to do is make the destinction between the high risk and the low risk loans. If someone can't make payments don't give them the loan. This is the reason that the housing markek is where it is at. 3 years ago a McDonalds employee could buy a 300K house without any proof of income. We need tighter lending practices to fix the hole we are in.