BailoutWatch: Lower Rates for Everyone!

Submitted by Rich Toscano on January 25, 2008 - 12:43pm

Yesterday it was announced that Congress and the White House had come to an agreement on an economic stimulus package that would raise the limit for conforming home loans, those backed by government-sponsored loan securitizers Fannie Mae and Freddie Mac, from the current $417,000 to about $730,000 in the most expensive states (of which we are obviously one).

Why does this matter? Because the rates on conforming mortgages tend to be quite a bit lower than those on loans above $417,000, also known as jumbo loans. Right now jumbo loans typically carry rates more than 1 percent higher than their conforming counterparts.

And why are conforming rates lower? Because lenders think that Fannie's and Freddie's debt will be guaranteed by the government.

read more at voiceofsandiego.org

(category: )

Submitted by sdduuuude on January 25, 2008 - 2:51pm.

Just because they raised the limit doesn't mean many more people will qualify for these loans between 417K and the new limit.

They lowered the rates, but doesn't "conforming" mean they also raised the requirements to get the rates ?

Submitted by AKguy on January 25, 2008 - 3:06pm.

Some people with jumbo loans will be able to refinance into a lower rate loan than they would have before this change. These folks will have the income, credit rating and equity to make it work. No doubt most of them could have afforded the higher jumbo rates, so if they have an additional ~$300 in disposable income, all the better for everyone.

On the other hand, if your mortgage is under water and/or you couldn't afford the house in the first place without an IO or Option ARM, falling prices had hosed you before this change, and you are still hosed after the change.

I'm guessing this is not going to have much of an effect on the bursting housing bubble.

Submitted by La Jolla Renter on January 25, 2008 - 3:18pm.

Any mortgage guru out there know what the requirements will be to get the max, 730k conforming loan?

Income, Debt ratio, credit score, down payment, etc.

I can't see this having a big impact... maybe 1 out of 100 homeowners saving $300 or more a month on a mortgage payment.

Submitted by paranoid on January 25, 2008 - 3:47pm.

Stimulus plan may lead to higher mortgage rates

http://biz.yahoo.com/rb/080125/usa_mortg...

Submitted by LA_Renter on January 25, 2008 - 5:08pm.

Here is Tanta's comments at Calculated Risk on how this can lead to higher interest rates

"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"

LOL...All this uproar and nothing really changed.

Submitted by GunDoctor on January 25, 2008 - 10:09pm.

I think that step one was raising the limits.
How long do you think it will be before the polititions start tinkering with the definition of
Conforming!!

Since the taxpayers are backing it anyway...why not put us all on the hook for 5% down, up to 125% of apprisal. After all its all in the name of saving the ecomomy.

I think I just got it. There are more owners than renters WHO VOTE. Dame the consequences to the nation. the politicions will do what is best to get reelected.

Submitted by patientrenter on January 26, 2008 - 9:25pm.

Spot on, GunDoctor!

1. As Rich says, this will lower the rates on mortgages between $417K and the new higher limit, because the government guarantee has a real value. Tanta wasn't saying anything different. She was just saying that mixing lower-amount GSE mortgages with the new higher amount GSE mortgages could hurt the rates on the lower amounts. Overall, borrowers in the aggregate would still get a bigger subsidy on their interest rates (by not having to pay full market interest rates for risk).

2. New buyers will get no improvement in affordability in the long run. Why? Because this move is intended to boost home prices, and they will be higher than they would be without the govt guarantee by just enough to offset any savings from a lower rate.

3. If this move fails to boost prices to the full extent described in 2. above then, as GunDoctor says, the underwriting requirements will be loosened to make this happen. If the GSEs run into capital or ANY other limits, that too will be removed by changes at the OFHEO or whatever else is required.

Why will all this happen? Because, again to repeat GunDoctor's point, there are a lot more voters who already own homes than are waiting to buy their first home. It's as simple as that.

Patient renter in OC

Submitted by sdrealtor on January 27, 2008 - 10:48am.

spot on pr

Submitted by JWM in SD on January 27, 2008 - 1:38pm.

JWM in SD

"...there are a lot more voters who already own homes than are waiting to buy their first home. It's as simple as that."

Yes, but who is left to buy all of their homes then at artificially inflated prices? We are back to square one again. As I've said a dozen times already, unless inflation makes its way into your median wage, then it doesn't matter what they do.

The housing market is screwed one way or another because the economy is screwed one way or another. No amount of whining from the REIC (including those on this board...you know who you are) is going to change that.

Submitted by dontfollowtheherd on January 28, 2008 - 11:43am.

JWM - You're absolutely right...

The bottom-line in all of this mess is the Treasury Dept. (and Pols) trying to pull an end-around on an inevitable and hoping it will become an eventuality. The market will sort itself out once all the details have been factored in the process. There is a plethora of foreclosed homes coming on the market daily that will put greater pressure on existing listings to lower their prices more and more. I talked with the wife of a guy who works for one of the two major default companies the other day and she's been helping him pull files on weekends. His assistant pulled 300 files and she pulled another 500 for him on one day alone. There are 20 more of him in the office doing the same thing. He has enough work to last him for 3-5 years. No one is suddenly going to run out and start buying homes en masse for a long time because the psychological damage has been done. The r.e. market is toast for a few years at the very least inmho. This was an anomaly in terms of ridiculously low interest rates coupled with liar loans and the "free market" economy that is capitalism will deal with it - harshly or not.

Submitted by FormerSanDiegan on January 28, 2008 - 11:55am.

The higher conforming limit is a temporary patch that will not work as intended.

However, am I the only one that thinks the conforming limit should be higher in LA, San Diego and other parts of California than places like St. Louis, Atlanta, Louisville, Cincinnati, Kansas City, Denver ?

Submitted by JWM in SD on January 28, 2008 - 12:07pm.

JWM in SD

"However, am I the only one that thinks the conforming limit should be higher in LA, San Diego and other parts of California than places like St. Louis, Atlanta, Louisville, Cincinnati, Kansas City, Denver ?"

Ummm, I sure as hell don't. I'm from the Midwest. I don't like the moral hazard present when some poor schmuck making 50K a year in Kansas City, and who will never, ever, own a 600 or 700K home, has to subsidize a bunch of Clownifornians who think that it is their right to extract equity from their homes because "...it doesn't get cold here in the winter...".

Submitted by FormerSanDiegan on January 28, 2008 - 1:08pm.

Ummm, I sure as hell don't. I'm from the Midwest. I don't like the moral hazard present when some poor schmuck making 50K a year in Kansas City, and who will never, ever, own a 600 or 700K home, has to subsidize a bunch of Clownifornians who think that it is their right to extract equity from their homes because "...it doesn't get cold here in the winter...".

I, too am from the Midwest. However, $417K is well above the median in these places. In some cases 2X the median price.

In many of these places you can get a nice spread in a golf course community for $450-500 k ... and fall within the conforming loan limits.

What about the fact that all the poor Clownifornian schmucks making $100K and living in a 2-bedroom rentals have to subsidize the conforming loan of some mid-level manager living near the golf course in his 4000 square foot house ?

Example here:
http://www.zillow.com/HomeDetails.htm?zp...
and here:
http://www.zillow.com/HomeDetails.htm?zp...

The economic reality is that even at mid 1990's pre-bubble real estate bottom pricing, places like San Diego were 2-3 times more expensive than places like Kansas City for the equivalent property.

Conforming loan limits are higher in Alaska and Hawaii, presumably because these areas are more expensive. Why not in California ?

Submitted by JWM in SD on January 28, 2008 - 5:13pm.

JWM in SD

"Conforming loan limits are higher in Alaska and Hawaii, presumably because these areas are more expensive. Why not in California ?"

Oh come on, you can't be serious right? Last time I looked at a map, HI was an island state where the only access route is by air or sea. Alaska is somewhat better but you have to cross an entire foreign country to get there. The worst thing you cross getting to Cali is Death Valley...and maybe west Texas. Not an apples and organges comparison there FSD try again please.

"However, $417K is well above the median in these places. In some cases 2X the median price."

How many mid-level managers are buying homes at ten times their income in the midwest relative to SD, LA, SF? Also, you can't tell me that you needed 700K to buy in the Inland Empire even at the peak of the boom.

"The economic reality is that even at mid 1990's pre-bubble real estate bottom pricing, places like San Diego were 2-3 times more expensive than places like Kansas City for the equivalent property."

And the economic reality is also that the chump in California is par more likely to default and / or get in trouble at 7 to 10 times income for median home prices than his brethern in the Midwest at 3 to5 times income.

It's all about risk FSD...that's why raising the GSE levels won't help because the conforming requirements were based on borrower ability to pay, not the amount they borrowed.

If you are from the midwest, then you are familiar with this saying: "...don't bring a knife to a gunfight...".

Submitted by FormerSanDiegan on January 28, 2008 - 6:38pm.

Oh come on, you can't be serious right? Last time I looked at a map, HI was an island state where the only access route is by air or sea. Alaska is somewhat better but you have to cross an entire foreign country to get there. The worst thing you cross getting to Cali is Death Valley...and maybe west Texas. Not an apples and organges comparison there FSD try again please.

Please explain why the terrain passed when traversing to a particular state has to do with the conforming loan limits ?
I do not get it.

My point was that prices are significantly higher in some markets, even when based on fundamentals (such as incomes).
Incomes are significantly higher in California than on average over the US (I thought this was obvious). For example, in 2006 median household income in San Diego was 58K. In Kansas City, it was 40K. So, if we assume that home prices revert to the same ratio to income in San Diego as for Kansas City for example, prices would still be 45% higher.
CA as a whole has household incomes about 30-35% higher than most midwest states.
The end result is that a much higher percentage of the population in less expensive places like Kansas City will fall within the conforming loan limits than places like San Diego.

And the economic reality is also that the chump in California is par more likely to default and / or get in trouble at 7 to 10 times income for median home prices than his brethern in the Midwest at 3 to5 times income.

This sounds like a stereotype to me. We do not have a monopoly on chumps defaulting on their loans ...

http://www.kccommunitynews.com/articles/...

If you are from the midwest, then you are familiar with this saying: "...don't bring a knife to a gunfight...".

Of course I've heard this. But, I didn't even know it was a fight. I intended to engage in civil discourse. Fighting on a blog is like the special olympics. Even when you win, you still look retarded.

Submitted by JWM in SD on January 28, 2008 - 7:43pm.

JWM in SD

"Please explain why the terrain passed when traversing to a particular state has to do with the conforming loan limits ?
I do not get it."

Think about it. You are comparing a tropical island in the middle of the pacific ocean that is largely dependant on tourism and miliatry spending for its economy to the most populous state in the union that has been rated as 6 or 7th largest economy in the world. As for Alaska, well...how many days of summer do they have there? Not a valid comparison by a long shot.

"My point was that prices are significantly higher in some markets, even when based on fundamentals (such as incomes)."
Agreed, but my point is that prices are significantly higher in some locales despite fundamentals. I think that is how Rich began this site is it not????

"So, if we assume that home prices revert to the same ratio to income in San Diego as for Kansas City for example, prices would still be 45% higher." That has nothing to do with income to price ratio though.

"CA as a whole has household incomes about 30-35% higher than most midwest states." Then why does CA need a conforming loan limit that is almost 70% higher than the rest of the country???? Additionally, if the median house price in many parts of the midwest is only half of the 417k limit, then the difference is even more egregious. You just proved my point whether you realized it or not.

Submitted by AKguy on January 28, 2008 - 8:11pm.

In 2005 we sold our 1350 sq ft house in the SF Bay Area for $775K and bought a $532K, 2850 sq ft house in Juneau, AK. Views and quality of neighborhoods are comparable. Juneau is the most expensive city for RE in AK, but it's still way behind the Bay Area in RE prices (and wages are back in the '70s by comparison). Why should the conforming limit be higher in AK than in expensive parts of CA?

Submitted by cr on January 28, 2008 - 8:26pm.

Band-Aid on a broken leg.

Submitted by Michelle Steffes on January 29, 2008 - 12:33am.

Michelle Steffes

Don't hold your breath about buying that SD dream house. To get a Fannie or Freddy loan you have to show real documentation. Not the stated stuff of years past.

Submitted by NotCranky on January 29, 2008 - 12:42am.

You can make a quantitative argument for the limit increase that make sense either way. I could say for instance 417k is enough for California and is superfluous to the rest of the nation with regards to the intent of these programs especially FHA.
My problem with the limit increase isn't mathematical it is philosophical. Raising them at the current time seems intrinsically bad. The motivations are wrong IMHO as was the funny business that apparently created the need. I am also concerned that more allowances will be made, in conjuction with these limit increases, such that the gse's can pass some of the already bad paper on to tax payers.It is not as if all of this is transparent.

Without more devious plans the limit increases don't change affordability and therefore demand very much in and of itself so prices must continue to come down. I don't believe underwriting standards are going to be abused to the extent they were any time soon( I will keep an open mind about that though). Interest rates will affect house prices more so when we near a real floor.

I do agree that there is possibly a convergence of factors that make the market or some segments look a little better in the next few months .Some properties will continue to hit new lows everyday and some might hold ground for a few months.
The market in general has still got a long way down to go if the pols, Fed and mortgage industry don't come up with something better than what they are throwing at the bust so far. Maybe they will keep juicing the housing market perfectly from here on out while the economy miraculously turns to and holds on to prosperity. I doubt it.

Submitted by FormerSanDiegan on January 29, 2008 - 9:43am.

Sorry to be so dense, but I still do not understand the economic connection between the number of days of summer in Alaska and their higher conforming limit.

Submitted by FormerSanDiegan on January 29, 2008 - 9:57am.

Please re-read my initial post. I disagree with the 730K limit. I do not think it will work.

I am not arguing that a bubble does not exist. Prices have been (and still are for the most part) way to high relative to incomes here in So Cal.

I will try again ...
A thought experiment: Assume that the bubble has burst and prices have reverted to N-times income levels in the bubble regions (say 1997 levels of price to income).
A uniform conforming limit applied across all regions results in inequities between regions that have higher incomes and those that have lower incomes. A higher percentage of the population in the lower paying regions will have the benefit of the conforming limits.
This inequity could be changed by either lowering the conforming limits in some regions (as Rustico mentioned) or raising it in the other regions (as I suggested).

Submitted by JWM in SD on January 29, 2008 - 10:27am.

JWM in SD

Look FSD, I know that you are not advocating that the bubble be perpetuated. I just don't understand your justification for higher conforming limits when the existing limits had already accounted for the fact that there is, and always will be a premium in price to income ratio in the west coastal cities. The national median house price is what, $200 to 250K? The upper limit is/was $417K...that's a 100% difference (or thereabouts)so there is plenty of margin there to account for price to income differentials. Comparable wages from Chicago to SD/LA is not 100% for the equivalent job...I know, because I moved from Chi-Town to SD in late 2004. You know, because you cited as much in previous post. Additionally, you can't just say that California has generally higher wages either. I have been conducting job searches in all of SoCal for the past year. In Riverside county (even coachella valley where its expensive), I would have to go back to what I was making almost ten years ago in the MIDWEST!!!!! Again, you need to make apples and oranges comparisons.

You seem to want to base local conforming limits on inflated price to income levels and that is what I take exception to because that would inadvertantly be supporting the bubble perpetually.

Submitted by FormerSanDiegan on January 29, 2008 - 11:59am.

Additionally, you can't just say that California has generally higher wages either.

Yes I can. And it does.
Incomes are higher in California than in midwestern states. According to the Census Bureau for 2006 (latest year available):

Median Household income
CA = 56,645
IL = 52,006
MO = 42,841

Also, incomes are higher in AK and HI, (59K and 61K respectively) which I believe is the reason for the higher loan limits there. It has nothing to do with the number of days in summer.

You seem to want to base local conforming limits on inflated price to income levels and that is what I take exception to because that would inadvertantly be supporting the bubble perpetually.

No I do not. Again, lets consider a non-bubble situation. Was there a bubble in 1996 - 1997 ? Look at Rich's charts, local housing was depressed. Even at that point, the comparable house was still 2-3X more in San Diego than in the midwest.

Perhaps you are correct that the 417K limit accounts for wide variations across the country. This number may even be the right number for CA. However, this one-size fits-all approach means that a higher percentage of folks in some areas get a benefit at the expense of folks in other areas. I believe the conforming limit should be higher in CA than in Illinois, Missouri and other places, to reflect local costs of living.
... but I guess I'm the only one.

Submitted by JWM in SD on January 29, 2008 - 12:04pm.

JWM in SD

"However, this one-size fits-all approach means that a higher percentage of folks in some areas get a benefit at the expense of folks in other areas."

Not if traditional lending standards are used. Either you qualify to take a particular loan value or you don't. The problem lies in the government wanting to ease those standards and still use the same risk profile that was given under the stricter standards used.

Submitted by FormerSanDiegan on January 29, 2008 - 12:20pm.

Not if traditional lending standards are used. Either you qualify to take a particular loan value or you don't.

OK, let's consider that ...

Let's assume that 150K income is needed to conservatively qualify for a 417K loan. In Missouri that includes about 96% of the households. In California it includes 89% of households. Therefore a higher percentage get the benefit in places like MO than CA.

I stand by my quoted statement.

Submitted by jeeman on January 29, 2008 - 12:24pm.

Looks like raising the limits has been shelved for now:

http://www.housingwire.com/2008/01/29/fh...

Jeeman

Submitted by JWM in SD on January 29, 2008 - 12:50pm.

JWM in SD

"Let's assume that 150K income is needed to conservatively qualify for a 417K loan. In Missouri that includes about 96% of the households. In California it includes 89% of households. Therefore a higher percentage get the benefit in places like MO than CA."

You are assuming equivalent houses at $417K...we both know that even after the crash that won't be the case. When I moved here in 2004 the first recruiter I spoke said "...welcome to California, now it's your turn to pay the sunshine tax too...".

Submitted by FormerSanDiegan on January 29, 2008 - 1:28pm.

You are assuming equivalent houses at $417K...we both know that even after the crash that won't be the case.
I did not assume this. Good point however ... 417K buys much more in the midwest than in CA, further proving my point that a uniform conforming limit is not equitable.

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