Another expert has another “low risk fix” for the housing market: [But I beg to defer.]
The housing market is currently stuck in a morass, and there are few signs that the situation will improve in the near term. The chief problem is a self-reinforcing spiral of price declines, lost equity, foreclosures, and further price declines. Credit is tight and underwriting conditions are even tighter. Total Mortgage president and founder John Walsh has an idea that he believes will help stimulate the housing market at relatively little cost and risk to the taxpayer. He would like to see the Fannie Mae and Freddie Mac conforming limits raised across the country. Walsh would like to see conforming limits raised to $729,750 in all regions of the country in order to stimulate the jumbo market, which has struggled in recent years due to lack of investors.
As Walsh explains, it currently is difficult and expensive to get a jumbo loan:
Presently underwriting standards for jumbo mortgages are extremely stringent, stemming from the lack of private investment dollars in the sector (there has only been one jumbo securitization in the past year). Many lenders require very high down-payments. These conditions greatly reduce the pool of eligible buyers for jumbo properties.
Here’s his suggestion for making it easier to get a jumbo and “stimulate” this segment of the market:
Making GSE funding with sensible underwriting guidelines available up to $729,750 across the nation would cause more homes to be sold and would allow many borrowers to refinance their mortgages at lower rates. For many people the savings would be considerable, and this money saved on mortgage payments would be pumped back into the economy.
The problem lies with the “sensible underwriting guidelines”. Those private investors that are charging the high interest rates and requiring large downpayments are using sensible underwriting guidelines. Remember back during the boom when agents would point out that if appreciation is running at 10%, you make more money on an expensive home than a cheaper one? The same is true about depreciation, when prices go down 10%, the losses for a more expensive home are greater.
There is also a problem with the reduced pool of potential jumbo buyers. Even if lending rules were relaxed and lower down payments were permitted, higher unemployment, lower credit scores, lower net worth and lack of buyer confidence means fewer customers for these homes. The supply/demand imbalance makes these larger loans inherently risky. Private investors recognize this. That’s why they want large downpayments to lower their exposure and higher interest rates to compensate for their risk. Private industry is utilizing “sensible underwriting guidelines” already. What Walsh is really suggesting is that government provide loans with less sensible guidelines than private industry is willing to follow. Private investors are virtually gone below the conforming limit because they can’t compete with the less stringent standards of the GSEs.
Under the regulator’s most positive home-price scenario, Fannie and Freddie would lose $6 billion over the next three years and they would still have to ask the government for 11 times that amount to make dividend payments. On its most likely projection—which assumes an end to the housing crisis is close and that home prices will stop falling soon—it will lose $19 billion in the same period.
On the other hand, if the economy slides back into recession and home prices fall by another 20% to 25%, the companies could cost taxpayers an additional $124 billion, before dividend payments.
Another drop in values could lead to more delinquent borrowers with fewer options to avoid foreclosure. Price declines could also lead to losses on the nearly 200,000 homes the firms have taken back through foreclosure.
Clearly the risk and the losses for taxpayers is high, even with a conforming limit of $417K. To raise the limit is to raise the risk. The explanation for this is readily apparent from the following chart of sales and listings by price segment. This chart of sales and listings from the Phoenix metro area last July shows how the more expensive a property, the higher the supply/demand imbalance. [Data from ARMLS.]
The greater the imbalance, the greater the risk that prices will fall. This is not a “low cost, low risk” solution for taxpayers. This is just one more attempt to prop up sales and home prices- and send the bill to the American taxpayer.