Coming soon: Junior jumbos

News item: The Senate today approved a more than $168-billion economic stimulus package today that will send rebate checks to low- and middle-income Americans. As expected, the Senate agreed with the House and lifted the conforming loan limit to help California and other high-cost real estate markets.

The L.A. Times reports: "And in a provision that could benefit California and other states with high housing costs, the measure includes a large one-year increase in the size of mortgages that can be backed by the government -- up to $729,750 -- making it easier for homeowners to refinance into more affordable mortgages."

As I've said before, I strongly doubt it will be a one-year increase, and would be happy to hear from someone who believes Congress will lower the loan limits a year from now.

Comments

[Cal]

Fannie/Freddie, forget it, with OFHEO breathing down their neck, hitting up capital restrictions (even though those are about to be loosened up), about to (according to analysts) report more big losses AND the PMI companies tightening significantly (which affects all Fannie Freddie loans above 80% LTV) .. they will make zero difference to the California markets. It will allow well qualified buyers with credit, down payments, and good ficos get a half of percent cheaper loan.

Now FHA..
Allowing higher FHA puts a floor under the market free fall in some respects. The floor is approximately 29% of income for housing cost (approximate because 29% can be moved with significant compensating factors). FHA is full doc. So not really a big help here.

FHA also underwrites at a fully amortizing payment, again a hit to purchasing power.

Where FHA will make a difference is the lower down payment requirement, 3% (soon to be reduced to 1.5%).

If you can prove income and have some minor scratch in the bank, you'll get the home (FICO isnt nearlyas important in FHA as it is to modern lenders). This portion of the FHA support will prevent financing contributing to a total meltdown. Now buyer psychology on the other hand can't be predicted. People want to buy homes we see that clearly, only the economy going south would change this psychology imho.

But we didnt get to the point we are now by people proving their incomes and living within their means. A couple making 150k would qualify for a 465k mortgage at 6% interest rates under FHA guidelines (for every 10k in income you could borrow 31k in this scenario).

I simply dont see it helping the market fall from its highs, I just see it helping the market from overshooting to the downside.

Think about it this way, Nevada, Arizona, Central California, Florida all have been under the conforming limit and yet still are crashing to think that our issue is because the conforming limit isnt high enough is folly. It isnt liquidity issue, it is the economic ability to afford a home.

[Justin McCarthy]

Hi Cal:

A little too rigid on understanding of FHA's rigidity in my opinion. FHA allows 1 year (as opposed to 2 year) income and employment history which, I believe, will bridge gap or allow self employed folks within a year to bridge gap between stated and "full doc". It's more forgiving, especially if you consider the higher DTI allowance with FHA (50% last time I wrote one). The fact that FHA has rigid (self) appraisal guidelines will mitigate the bloated appraisal portion of our dilemma and work well to bring into line some of these more toxic loans. If you combine this with the lower down payment requirements, as you point out, lower Fico and lower reserve requirements, It's my belief that these increases will serve well to transition SOME of these "toxic" loans as well as supply some sort of underpinning. Best Regards.

[Cal]

Justin,

29/41 is the guidelines, with 31/43 being the guidelines max when manual underwriting.

To go above that there has to be "significant compensating factors" as detailed in section 2-13 of document 4155-1 found here http://tinyurl.com/3xhgfo

I've seen on the broker boards where people are hitting 60-65% back end ratios but its in situations where people have significant assets and isnt the norm. If a shop is consistently shipping deals significantly above guidelines they are going to lose their ability to originate FHA loans, so pushing the envelope in this market risks removing the ability to fund loans from the last available funding source. Now if you are a broker shop, you tell me.. just how hard are you going to push that envelope?

[Cal]

I also forgot to mention the other obvious reaction (unintended consequence) of this action.. higher mortgage rates.

The market for these securities isn't unlimited for them to attract more capital (since they are rescuing the market, they are writing more loans, right?) they must increase yields. There is a cost for everything, it doesnt come free.

If they mix the "conforming jumbo" in with conforming, the people buying the bonds will price all of them as if they were a jumbo risk. If they break them out into jumbo and conforming then the higher risk jumbos will get higher rates. Either way the savings wont be nearly as pronounced as some might think. It will probably reduce the current spread about half (from 1 % to .5%)

[Neilskisv]

Hi all, I do not live in So Cal. I live in an expensive area of Idaho. Does anyone know how they plan to define 'median home price' for the purpose of deriving the max conforming loan limit? In our area there would be a substantial difference depending on whether this was done by county, zip code, city, state, or some other factor. Thanks.

[Rho]

When will this "new limit" go into effect?

[Dankster]

This is a sort of "silent bailout" in the sense that it takes a lot of California real estate with prices beyond those justified by economic fundamentals, and just throws it in the same risk pool with the rest of America.

I understand the politicians' temptation to prevent a quick deflation of home wealth in an election year.

But the "moral hazard" here is huge. Those who took risks traditionally considered stupid will get a bailout, and those who made financial decisions traditionally considered responsible will get stuck with part of the bill.

I say "traditionally considered stupid" and "traditionally considered responsible" because if this is the way the government reacts to the consequences of risk-taking, the new paradigm is that risky behavior is smart and prudent behavior is for suckers.

[1]

Is there truly a need for the government to help people purchase or keep $600k+ houses? I don’t see it. You buy within your means, or you don’t. Government help to speculate in housing is crazy.

[joe shmoe]

Cal seems too optimistic about the buoying effects on the market of the upwardly revised confoming limits.

Once Fannie and Freddie start offering jumbos it will help some individual owners to refinance and help some new buyers . . . but I don't think it will reduce rates on the newly named Junior Jumbo loans as much as Cal predicts, if at all. Moreover, I think this upward revisin of conforming limits may well cause Fannie and Freddie to stall and gum up their gears as they will need to sort out the whole thing: distinguish conforming from junior jumbo? How to get the capital and how to divide it between different loan sizes? All this and more will need to be worked out within Fannie and Freddie, and between them and their regulator, and then between all of them and the bond markets, which have already spoken about their concern that offering a one size fits all higher conforming loan would lock up the TBA bond market and thus remove a major source of capital funding for Fannie and Freddie....

If Fannie and Freddie slow down or gum up for a few months while trying to sort out this mess by trial and error . . . . then loans will become almost impossible to come by at any level, at least for a little while......

On the upside for the housing market (as opposed to some individuals) the new limits will have negligible effects.

On the downside, it could well be a big gamble with severe costs.

If you want the market to crash, nothing to worry about here.

If you want the market to deflate in a relatively orderly way, pretty quickly, but without panic and chaos, then I think this was a bad move . . . typically Bushian: wreck the rescue organization you send in for the rescue.

Joe

[Tombstone Realty]

I doubt most of the people who are going to try for this refi are even going to be able to qualify.

This is just using a squirt-gun against a forest fire. Ain't gonna work.

[John in SoCal]

This is way out of control. Prices skyrocketed due to a mania and not from any fundementals. These prices today are going down. So there is no need to increse loan size by any degree. Let the market continue to
correct as it has in prior decades. Last we forget when
we had a similar issue prices declined by 40% in LA and SD. Has everyone forgotten that.

http://www.housingbubblebust.com/OFHEO/
Major/SoCal.html

Congress needs to stop meddling in the economy and let it go.

[Justin McCarthy]

Thanks for your comment, Cal. The underwriting standards as published may-- if they haven't been restated 10 times since then, possibly publish a 41% backend DTI. However, every FHA that I've heard of (actually got one myself 15 years ago with very little assets) and overseen on DU (desk top underwriting) has easily accommodated a 50-55% backend DTI. This allows the "legitimate" self employed-stated crowd, in my opinion, to ready their finances by filing an accurate tax write off the previous year in order to secure a refinance the following.

That's my point, these are fairly forgiving, but somewhat more regulated loans allowing for a smoother transition for the folks that may actually be able to afford the house they live in.

It's in my opinion that there's something very undemocratic about only allowing, by virtue of eliminating a junior jumbo mortgage secondary market, those that can pay cash to buy in any area with median price over 362k or 425k the chance to better their lives and own a home. California has needed a high cost area FHA designation, like AK and HI, for a long time.

Cal, I don't know if this increase will do anything, but it seems like a logical step.

[ankara arsa]

woww nice topic thnx a lot

[Justin McCarthy]

My mistake Cal....FHA IS much more rigid...It is actually Fannie/ Freddie DU that I had in mind as lenient, not FHA as you pointed out. However, I believe both limits have been increased.

[Cal]

Fannie/Freddie are worse off over 80% because then they rely on mortgage insurance. And the insurers have become much more restrictive. Both MGIC and PMI Group have come out with tightened policies. PMI Group for example wont lend more than 90% LTV in distressed market (both insurers consider all of CA a distressed market), MGIC says for restricted markets Full doc only, 45% back end max for purchase and 95% CLTV max (700 FICO maxes out at 700k, 680 FICO 550k purchase price).

I think anything above 90% CLTV will start having to go through FHA because of how hard the MI companies are clamping down.