Yesterday the U.S. government decided to cure the economic ills brought on by irresponsible spending by doing more irresponsible spending. ["Hair of the dog" economic theory???] Among the more hair-brained proposals to come out was the idea to have Freddie and Fannie buy risky jumbo loans–loans which the private sector isn’t dumb enough to want–and believe that it is a GOOD Idea. According to the Arizona Republic:
There was, however, a glimmer of good news Thursday for buyers, sellers and homeowners, especially in such high-cost states as California and Florida, where home prices are falling and foreclosures are soaring. Congressional leaders struck an agreement on a stimulus package that includes a one-year rise in the loan limit for Fannie Mae and Freddie Mac, to $729,750.
Currently, Fannie and Freddie can buy only mortgages that are $417,000 or less. Larger loans, called jumbos, have higher rates because they’re riskier for investors, and that’s hurt borrowers in places like California, where the median home cost about $489,000.
The congressional package also raises the dollar limit on loans that can be insured by the Federal Housing Administration, which caters to first-time and working-income families, to $729,750 from $367,000. In today’s market, most lenders require 10 percent down payments; the FHA loans need only 3 percent.
In a rare moment of reason from a government official yesterday, James Lockhart, director of the OFHEO disagreed. The OFHEO released the following statement yesterday: [No link provided.]
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.
For those of us who feel that increasing the conforming limit is, in fact, a BAD Idea, we can take comfort from an article by Herb Greenberg of Marketwatch, who points out that there aren’t likely to be a lot of borrowers who qualify anyway:
–New borrowers still have to qualify. Fannie/Freddie is full doc only primarily.
–Without stated income for wage earners, it’s tough to qualify for a $700,000 loan.
–In 2005 to 2007, 70% of all jumbos were stated income for a reason: Ninety percent of all stated income borrowers lied about their income to qualify.
–Refi’s will still have trouble due to values dropping in jumbo areas by such a large amount. These are the ones that really need the help.
In many markets around the country, the supply of expensive homes on the market is much greater than the general supply, putting greater downward pressure on prices. Falling prices means greater risk for the lender and/or insurer. Why should the GSEs take on this risk?
Every now and then, the "Internet Archive Way Back Machine" is a useful tool for seeing how a web page has been modified over time. I found it interesting that from around 2002 to the middle of 2006, the "About Fannie Mae" page stated the following about their mission:
At Fannie Mae, the home symbolizes who we are, too. Our public mission, and our defining goal, is to help more families achieve the American Dream of homeownership.
We do that by providing financial products and services that make it possible for low-, moderate-, and middle-income families to buy homes of their own.
After the middle of 2006 however, the same page states the following:
We exist to expand affordable housing and bring global capital to local communities in order to serve the U.S. housing market.
Fannie Mae has a federal charter and operates in America’s secondary mortgage market to ensure that mortgage bankers and other lenders have enough funds to lend to home buyers at low rates. Our job is to help those who house America.
Apparently once the housing market began to fall, Fannie’s purpose shifted from "helping families" to "serving the U.S. housing market" and "helping those who house America."
Sadly, safeguarding the interests of the American taxpayer [who has a poorly defined "implicit guarantee" to worry about] doesn’t seem to be part of their mission at all.
It sounds like there won’t be a great many "conforming jumbos" written out there. Here’s hoping not, at any rate.
[Many thanks to Doomers and our admin who provided the links!]
I don’t think it will do anything. People who can afford homes that expensive don’t need help and 1% higher interest doesn’t really deter them much. The 30000 dollar millionaires won’t qualify.
Sequoia-
There was a great article in the San Francisco Chronicle recently that was talking about the difficulties people were having qualifying in the upper end.
They said that a couple of years ago, you could qualify for a $1M loan with an income of $90K. However, with the wonky financing disappearing and standards tightening, it now takes an income of $175K. This has greatly limited the pool of buyers.
Yeah a point or two doesn’t make a huge difference for rich folks, but the luxury market boomed because lots of folks who weren’t rich were buying into that market.
Those are the folks they are trying to keep in the game, but in the current environment, I don’t see that happening.
twist -
Great dig!
For years I’ve been reading paranoid conspiracy theories on the housing- / econo- blogs that this is all about the banks, hedgies, etc. and the actual homeowners can pound sand. So now that the bubble has burst, Fannie has made it official.
Indeed, this is a significant find, and you and your team are to be congratulated.
Doomers-
John as always is a modest [if low profile] member of team.
Thank you John!
OK everyone, here’s the bottom line (jeesh, I barely remember how to do this!)
“More Risk for Fannie, Freddie? New Stimulus Package Promises to Change Standards on Loans”, by James R. Hagerty and Michael Corkery, Wall Street Journal, January 25, 2008.
Don’t worry John, the link’s over there on the right. Igor’s word: badidea.:-)
Twist,
Good job Twist, congratulations are in order. I believe I heard Diana Olick mention Housingdoom on TV and gave props to this exact story. First they ignore you, then they ridicule you, then they fight you……
Thanks for fighting the good fight for sensible American’s.
Entropy-
I was pleased that Olick decided to go with the FNM story- their website shows rather clearly the shift in their focus, in spite of their denials.
The shift is an important one. If the GSEs are about affordable housing, they won’t worry about a lack of financing in the jumbo range- they just let prices fall down to the conforming limit, and a whole bunch of housing becomes more affordable. However, if their mission is to keep lenders and the housing industry afloat, then raising the limits to prop up prices makes sense. I think we deserve to know what it is they are really trying to do.
to put it metaphorically, they are like pilots trying to land their plane with no fuel, landing gear retracted and the controls unresponsive. I wonder if they can get it down without crashing.
Entropy-
Even the best of pilots can’t land safely under those conditions, and we don’t have the best of pilots.
[Igor sums it up nicely: titanic]
I have to agree with the "senior Republican aide" in the Wall Street Journal this morning:
Good question.
Had these higher limits been in place over the past few years the GSEs would have been exposed to the California housing meltdown which likely would have bankrupted them.
IMOHO the limits should be set in a similar manner as FHA based on median housing prices in a region. Say 150% of the median price. This would drop the limits in many areas and raise them in others. This would still cover upwards of 85% of the housing in America.
I completely disagree with your contention that the mere size of a loan makes it “riskier”. I have a jumbo loan, and so do most of the people I work with. Given equivalent DTI and LTV ratios and FICOs, how is it that one $600k loan is riskier than two $300k loans?
The idea that the GSE’s exist to support low-income housing is archaic, it hasn’t been true for at least 20 years. Crikey the conforming limit was around $250k back then, and it’s been $417k for many years. In most of the country those numbers bought a lot of house at the time they were set. The GSE’s transitioned from low-income housing to facilitating liquidity a long time ago, and everyone knows it. It’s about time they updated their web site.