Conforming Jumbo Limit Changed, but wait.......

Congress' plan to help the jumbo loan market -- passed two weeks ago as part of the Economic Stimulus Act -- still is a work in progress. Key details of the plan were left to the Department of Housing and Urban Development to nail down, which may take until next month. What's more, the securities industry's biggest trade group last week surprised lenders when it recommended that larger loans be in effect isolated from smaller mortgages in the "secondary" market, where loans are packaged into securities for sale to investors.That could keep interest rates on jumbo loans higher than some borrowers had hoped, analysts say. All of this has many homeowners who want to refinance, as well as would-be buyers, on edge -- particularly in the high-priced markets. The market for large jumbo mortgages has been a major casualty of the credit crunch that has slammed the economy since late summer.

As loan delinquencies have soared and scores of mortgage lenders have folded, many remaining lenders have become unwilling to make loans unless they know they can sell them to Fannie Mae and Freddie Mac, the government-sponsored mortgage finance companies.But under federal rules, Fannie Mae and Freddie Mac couldn't buy loans larger than $417,000 -- the limit for what was labeled a "conforming" mortgage.The Economic Stimulus Act gave HUD the ability to boost conforming loan limits in high-cost areas to as much as $729,750 through the end of this year.The hope was that that would quickly help support refinancings and home purchases in expensive markets hit hard by the housing downturn. But Congress left it to HUD to set new conforming-loan limits by region, based on a formula that takes into account the median home price in each region. The department has 30 days from Feb. 13 -- the date President Bush signed the act -- to revise the jumbo conforming loan limits. HUD officials said this week that they had not yet come up with numbers. The department is expected to set new conforming limits on a county-by-county basis, just as it does for Federal Housing Administration-insured loans. If HUD's home-price data are similar to recent figures published by DataQuick Information Systems, analysts say conforming-loan limits would skyrocket through much of California, from the current $417,000 to at least $572,500 in Los Angeles County and $650,000 in Orange County.

Loan balances, however, are just one component of what makes a loan conforming. Other issues include the type of income documentation provided and a borrower's credit score. At Freddie Mac in McLean, Va., spokesman Doug Duvall said the company was discussing what the standards should be for larger conforming loans."We are going to be defining the loan-to-value ratios, how much down payment the person needs and the credit score of the borrower," Duvall said. "These are some of the things that we measure. We are wrestling with how different those will be from the traditional conforming" loans.Even if Freddie Mac and Fannie Mae begin buying significant numbers of larger loans, it isn't clear how significant an interest saving that will mean for borrowers.

Since the bad inflation reports and government intervention in the mortgage market three weeks ago the rates for 30Y fixed jumbo loans has moved up .50%. Th best value for clients is the 5Y and 7Y jumbo interest only loan. We have seen various information that possibly fifteen counties in the whole country would see a boost. Your neighborhood might be expensive but HUD is using the median for your county. The Hollywood Hills Real Estate you've haid your eye on and that condo in South Beach might be 1.5m but both counties have a median value in the mid 500's.

In our opinion this proposal was created to address the home owner with a jumbo loan balance in the 417-600k range. This is a bandaid on a large wound. Credit markets will continue to contract until the losses stop and the loans begin to perform again.

Waking Up to The Problem Most Americans Face

Mort Zuckerman of U.S. News and World Report gave a gloomy assessment of the housing market yesterday: he gets it. This is a housing depreciation problem not a "contained subprime" issue.

How much longer will house prices keep falling? That collapse is a larger threat
to our economic well-being than even the headline-grabbing problems of our
increasingly frozen financial system. We’ve had half a century of rising home
values, capped by an inflation-adjusted rise of 85 percent from 1997 to 2006.
Now the loss of value tops $1 trillion, and the financial world has incurred
hundreds of billions of dollars of losses on the premise that U.S. home prices
would never fall. The median price of a new home is at $206,500, receding to
where it was in November of 2003, thus wiping out more than three years of price
appreciation. It takes 6.3 months to sell a finished home compared with 4.3
months a year ago. The ratio of inventory to sales is the highest since October
1981—there’s an unsold extra backlog of a million single-family homes and
condominiums. Builders have cut their housing starts by approximately 40 percent
over the past year. David Rosenberg of Merrill Lynch estimates construction will
fall from a million units to approximately 700,000 units, an all-time low since
World War II.
House prices, though, haven’t fallen enough to tempt buyers,
despite sales incentives and rebates. According to the Conference Board, fewer
Americans plan to buy in the next six months than at any time since 1994. The
decline in conventional mortgage rates has failed to spark sales because it has
been trumped by tighter lending standards. Speculators, who helped fuel the
bubble, have virtually disappeared from the market.

The rest of the article is also interesting, and he did a good job of discussing the problem of fighting a deflating bubble with lower interest rates:

Lower rates can help those with adjustable-rate mortgages, but they cannot stop
the deflation of the housing bubble or prevent a tidal wave of mortgage
defaults. This is partly because mortgage rates reflect the 10-year treasury
bond yield more than the federal funds rate. That rate has dropped, but the
spread of both fixed- and adjustable-rate mortgages over treasuries has widened,
which means smaller declines in mortgage rates. Then there are those many
borrowers who got mortgages in 2003 and 2004 when the federal funds rate was 1
percent; they’re not going to get a better deal than that. And if they now have
zero or negative equity in their home, they won’t be able to refinance in any
event.
Zuckerman made this recommendation:
There is no time to delay in
combating the trends. Monetary policy cannot make bad investments turn good.
Cheaper mortgages won’t cure the market where properties are plunging so much in
value. The collapse of value will affect all homeowners and, through them, the
whole economy. It’s bound to be the most pressing issue in this presidential
election year. Voters in the primaries and general election should look to
candidates with credible policies in mind to address this downturn.

Too bad "candidates with credible policies" are in short supply. Too many of our politicians seem to believe that government can somehow stop the trainwreck if enough money is thrown at the problem. The FED and ECB have injected north of $500B into the markets in the last few weeks and mortgage rates have gone higher in the last few days. The FED is pushing on a string. Don't wait for the FED or a politician to handle your mortgage situation. Be proactive and review your options today as the programs, rates and/or your home value may be much worse tomorrow. We have spoken to dozens of people recently who can't refinance because they have little or no equity. The recent bill passed does nothing for these folks. The effects of the downturn can be addressed, but the downturn itself cannot be stopped. Policy can’t combat gravity.

New Conforming Loan Limit Becomes Law.

President Bush on Wednesday signed H.R. 5140, the Economic Stimulus Act of 2008, making official a temporary boost to both conforming and FHA loan limits. This might be the stiff drink the real estate market needs. The new law boosts the GSE conforming limit to as much as $729,750 through the end of this year, and also raises FHA lending limits to the same level for high-cost areas.

“I know many Americans are worried about meeting their mortgages,” President Bush said prior to signing the bill. “My administration is working to address this problem.” Bush cited HOPE NOW and the recently announced Project Lifeline initiative as examples of ongoing work by the administration to address the housing crisis.

A White House-produced fact sheet covering the new growth package is available here.
The U.S. Department of Housing and Urban Development now has 30 days to publish a database of house prices that will be essential in determining which markets get access to the new ‘jumbo conforming’ or ‘expanded FHA’ loan products.

Of course, that could prove to be bit of a problem in and of itself, given that HUD doesn’t currently independently gather or otherwise publish home price data. Bankrate’s Holden Lewis was on this right from the start when Congress first passed the bill:
The Office of Federal Housing Enterprise Oversight, or OFHEO, compiles periodic indexes of home prices. Fannie Mae and Freddie Mac use the OFHEO data each November to update the next year’s conforming limit.

The Federal Housing Finance Board and the National Association of Realtors both collect and publish home prices. The FHA takes information from both entities to calculate the FHA limits for each metro area.

Congress could have pegged the conforming and FHA limits to data collected by OFHEO, the Federal Housing Finance Board or the Realtors. But it didn’t. Instead, the law says: “The secretary of Housing and Urban Development shall publish the median house prices and mortgage principal obligation limits … for all areas as soon as practicable.” The law gives HUD 30 days to publish the database of house prices.

The simplest solution would be for HUD to use the same house price information it uses to calculate FHA loan limits. But a HUD spokesman says: “We have not yet determined if the same data will be used to make the new calculations.” That leaves lenders in the dark until HUD makes a decision.

While price designations aren’t yet known, a few industry sources close to the process have suggested that the new conforming limits won’t be as broadly applied as many might expect; just 15 counties in California might be designated as eligible for the loan limit increase, for example.
That’s not the only grey area out there, of course — there’s also the as-of-yet unclear issue of TBA trading in the secondary market that will need to be settled. Mortgage bonds are sold before the loan are completed and funded. That's why you lock in a rate. (The unconfirmed word from our sources today is still that the industry agency SIFMA wants to keep the new ‘jumbo conforming’ loans out of TBA pools.)

It’s also unclear exactly how the new jumbo conforming will price, given that neither Fannie nor Freddie have experience underwriting within the jumbo mortgage market.

Similarly, it isn’t exactly clear what the initial underwriting criteria will be, although most expect it to at least sit close to existing ‘traditional conforming’ guidelines — if not ending up more restrictive. “OFHEO has already gone on record saying that jumbo loans are more risky, so I wouldn’t be surprised if the underwriting guidelines end up being tighter than what you’d see for usual conforming products,” said one executive at a large lender, who asked not to be identified.

Conforming Loan Limit Increase and other ways to revive the patient.

It's always nice to take a step back every once in a while and try to see the bigger picture of what has happened in the past, and where we are right now. In my mind, when I do this I see so much stimulus injected into US economy and institutions and we aren't even in a recession yet, at least not in the minds of the organization that will ultimately declare it; the NBER. On a positive note, with the latest stimulus package there will be a temporary increase in the conforming loan limit for homebuyers; a positive incentive for those who both intend to purchase and can afford to purchase a home, especially here in Southern California where 50% of all jumbo loans are found. These jumbo loan changes should help affordability and ultimately help reduce record setting inventory in formally hot markets. Everything and anything can sell at the right price, econ 101.



Lets just list what stimulus we have seen since late 2007:

a) 175 basis points of cuts to fed funds rate; 1.75%

b) Cash injections into Merrill & Citigroup

c) Buyout of Countrywide Financial; whose stock price today is trading below the buyout price

d) Mortgage Rate Freeze Plan

e) Talks of Bond Insurer Bailout Plan; $15 Billion to cover Hundreds of Billions in potential losses, think of the failed Super SIV rescue plan that also boosted banks when announced

f) In Europe, bond bailout of Northern Rock by gov't to incentivize private takeover

g) Economic Stimulus Plan For Housing; make mortgages easier to get & cheaper

h) Economic Stimulus Plan For Biz; tax breaks

i) Economic Stimulus Plan For Tax Payers; checks to 117 million Americans

I'm sure I am missing a bunch of other cash injections to individual banks/brokerages, but am I missing any other major stimulus thus far? I think I got most of it. Now, again, there is still a debate about whether we are in a recession or not right now as chances are we won't find out until later on anyway. But forget that for a moment. Look at that list above! Are we really to believe that the economy is in fine shape with all this stimulus going on? How could we simply ignore the reasons for all this stimulus in the first place!

It's encouraging to see things happening, but will it all work? Will it stop defaults from rising? Will it cause more bubbles? Will it encourage a moral hazard and future reckless behavior? Will it stop housing from falling? Will it fix the credit markets? Will it fix the toxic waste holdings held on the books of financials? Will it really save the bond insurers? Will it stimulate consumer spending and consumption? Will it bail out those who made awful decisions? So many questions. So little answers!

With all this stimulus, it's not surprising that equity markets are bouncing here; but what I'm interested in is will this fix the problems we face without causing any future bubbles/inflation problems? Is this delaying the inevitable washout? All open for discussion as I wont give any predictions with so much uncertainty out there.

On a side note, the conforming loan limit increase moves the limit from $417,00 up to $730,000 until December 31st! The number varies per area based on 125% of median home values. The median in Los Angeles for example is just south of 500k. I think this is overall a good thing for client's but it does come with some question marks. Here are my thoughts:

POSITIVES: cheaper jumbo loan mortgages & cheaper fees for those serious buyers who have every intention of buying a new home. May increase purchase price budgets a bit with savings from taking on non-jumbo loan; hopefully with caution by the buyer not to exceed affordability. The experience of all the foreclosed families may prevent reckless buyers who decide to purchase based on this incentive alone but cant really afford it.

NEGATIVES: incentivizing homebuying by cheaper loans, how is this any different than what got us into this mess to begin with (no doc loans, option ARM's)? What happens if someone who is on the cusp of affording to buy, gets convinced to purchase due to this temporary offer? Will this setup future problems of distressed sellers should we indeed enter a recession? Will it really bring MORE buyers into our marketplace OR convince prospective buyers to increase their budgets dramatically thus rendering the investment unaffordable?

Overall, I would have think this is a positive for our marketplace. Since most people put max 20% down, and most condo buyers like to put only 10% down, we are looking at a target group of sub $785,000 for single family homes, and $695,000 or so for condos.
It will help those that have every intention of buying to 'pull the trigger'; hopefully without upping their budget too much! That's the only downfall I can see; over leveraging via a higher loan amount due to the projected 1% savings on the rate of the new conforming loan limit increase.
Where are we at in the real estate cycle and overall credit cycle?























Or is this the chart?: