patrick.net

@Brand,
There are a lot of vague details about the proposed changes to FHA and GSE that bother me. The MSM articles state these proposals are to increase limits to conforming loans for GSEs, to increase GSE funding to accept more subprime loans, and for FHA to accept less stringent criteria for borrowers (less down payment, in particular).

What is unclear to me is how the increased conforming loan limits are to be effected. These articles blithely report limits will be "higher in higher cost regions." How can that be implemented in any kind of a sane way? So conforming loan limits will be higher in the Northeast, California, etc. - what happens if other regions reach higher median home prices (WA, for example)? Will there be an adjustable scale? What if home prices decline substantially in a currently high-cost area (already happening in all of CA outside of the Bay Area and LA proper)? Do the limits ratchet back?

My second concern about these haphazard plans is they will merely serve as yet another artificial, external support for inflated home prices in these regions. It will in no way make homes more affordable or bail out a meaningful population. It will do the opposite - provide a floor for these overpriced homes.

Besides, all these "poor, duped" subprime borrowers - aren't they supposed to be people WITHOUT the means to afford jumbo loans? So why are the rule changes targeting limits affecting jumbo loans?

Too many questions...

Not that I agree with raising conforming loan limits. But outside the mainland USA, there are states/territories that are already designated as high cost.

From Wikipedia:

Limits for Alaska, Hawaii, Virgin Islands and Guam are 50% higher. Virgin Islands was designated a high cost area in 1992 and Guam in 2001.

skibum asks: These articles blithely report limits will be “higher in higher cost regions.” How can that be implemented in any kind of a sane way?

Those plans can't be implemented in any kind of sane way. That's pretty much what Bernanke and Paulson told Congress today. If you based the FHA loan amounts on the current prices in each market, that would act to fix the prices near the limit.

cb,

That's been true for a long time. My read of the situation is that the brilliant minds in Congress want to do the same for places like CA, NY, MA, etc. Maybe I'm wrong, but that's my impression. It's completely nonsensical. Of course, these proposals are by populist democrats from, you guessed it, CA, NY and MA!!!

OO Says:
Japan, Australia, UK, Canada, China, almost every country on earth is on a short-duration FRM or ARM. ARM is actually better for borrowers, because that puts them in a more defensive, conservative mindset.

hmm, it puts them in a sh*t-scared mindset... everything they do from then on is a fear response to increasing interest rates, including their voting decisions.

people on ARMs have effectively been asked to internalise all the risk of the financial sector, arising from markets and market activity they have no control over or understanding of, which are often only distantly related to housing and mortgages if at all.

so the lenders have managed to convince people to shoulder all the risk. with a fixed mortgage, you at least have certainty over your repayment schedule, you only have to worry about being summarily sacked from your job, paying for health crises or other unforeseen problems, and so on...

DS, although we frequently disagree, I think you just nailed my primary gripe about ARM loans. That was a good way to say it.

DS,

Are you saying that the UK, Oz, etc are full of really, really stressed out homedebtors? No wonder the Northern Rock run happened... The good ol' American J6P should therefore be sitting on his la-z-boy without a care in the world, then, in comparison!

OO: "how high is the current conforming limit being proposed? Is it going to be sufficient for the Bay Area market?"

Unknown, and probably not. They will at least bump it to the 600k that is current for Alaska and Hawaii. And, in at least one variant, it will be based on a percent-of-market formula that is estimated to be 720k in the SF bay area. I am not counting on any change BTW - if conforming rates become attractive I will dump enough cash into the deal to buy my mortgage down below whatever the limit is. That said, it would be nice if they just went to 600k.

600k isn't much in this market, but it ain't nothing. It's enough to finance a median BA house, if you put 20% down. Even on more expensive properties, 600k might make the difference if you are rolling over enough equity from another property, or have stock-option cash to burn. So on balance, I think the higher limit *will* have noticeable impact on our market.

One last point, I'm not sure this is doable but it may be possible to get two loans to finance a total of, say, 80% of a property. Thus you might get a fixed-rate first mortgage at 600k conforming, then a second ARM for the rest of the amount financed, the rest being the downpayment. Whether or not that's better than a jumbo depends on the terms of the ARM and/or the rate at which you think you can pay it off.

I was asking about the jumbo loan earlier because I wanted to figure out how big of the share such 3/1, 5/1, 7/1 Jumbo accounted for in the last few years.

DJM sent me the link for FRM Jumbo, however, it is not easily accessible on many sites. If you go to any mortgage loan sites, the usual choices for jumbos are 3/1, 5/1 ARM Jumbo. My experience with checking on the loan profiles on propertyshark in the last few months also confirmed this, because many recent buyers carry TWO mortgages, one Jumbo ARM, and one small FRM (the rule has it if you take out a Jumbo ARM, your secondary loan has to be fixed).

Which leads me to the next question, how much will reset affect the PRIME borrowers of the BA who are on Jumbo 3/1, 5/1, 7/1? Let's forget about the conforming limit for a while, no foreigners are going to buy anything from FHA, FNMA, FRE, period. Either we will have to print FAR MORE money than we already do today, or such a plan has no way in hell to be implemented.

Think about it this way. Almost every single home sold in the Bay Area since 2004 (median price $650-700K) needed a Jumbo, for which the loan will need to be $590K - $630K, if people were buying with 10% down, which they did not. So by covering this median situation, we would need to scrape up an extra $170K - $210K per mortgage, just for the Bay Area alone. If you look at entire CA, we are still talking about at least $150K extra financial support from FHA or whatever agency per home bought in the last 3-4 years.

I have no idea how many houses were sold in the last 3 years. but if you multiply that number with the extra cash infusion needed, I have a feeling it will be multi-trillion dollars just for CA alone. That, is a mission impossible.

That, is a mission impossible.

oo,

No, that would be "mission POSSIBLE!":

http://www.stanpacmissionpossible.com/

...or was that mission ACCOMPLISHED???

DJM,

I think you are in a small camp of people with FRM Jumbo. I just have not seen any single FRM Jumbo so far in my experience of looking up people's loan profile on propertyshark. ZERO, none. Everyone's loan term is VARIABLE. After they refinance, their terms are still variable.

If they raise the limit, I will extract equity from my home to max out the borrowing to that limit, and stash away the equity into gold or energy.

OO: You can't just take the number of houses * the average jumbo loan. It's not like all of those loans are going to zero principal. But still, 10% of a big number is a relatively big number. And if Fannie purchased many of those ARM loans to allow FRM refinancing, that would definitely strain their fiscal infrastructure.

DJM and oo,

This brings up another quesetion about the details of these proposals - so would the proposed conforming loan limits be based on regions as specific as the Bay Area? If so, would the limit be the same in SF, San Mateo, Marin, SC counties as it would be for Solano, Sonoma, Contra Costa counties? Or would they be county specific? Does the government's data (OFHEO I presume) have that degree of detail? Once you start slicing and dicing the market segments, the "n" gets too small to be reliable. Take it to the limit - so there would potentially be higher loan limits apply in say, East Palo Alto, with a median home price of probably $500k, than say, Blackhawk, with a median probably well above $1.0m?

Brand Says:

I don’t really understand this particular article. Aren’t most of you Bay Area folks holding off on a purchase because you think prices will take a huge fall? It didn’t seem like we have many posts who outright can’t afford a house. That’s a different problem.

I am priced out of the market. Yes, I could make a payment each month, but I'd have to forego personal and retirement savings, plan to not purchase a new car in the next ten years, not take vacations, etc.

Man, that grammar was garbled. It's getting late...

skibum Says:
Are you saying that the UK, Oz, etc are full of really, really stressed out homedebtors?

Pretty much. A few people have cottoned on recently and starting fixing a greater % of their mortgages, up to getting 100% fixed -- and fixed rates actually went below variable rates for some reason for a while here (which is kind of like a yield inversion, and implies the banks are thinking interest rates will descend, etc, but second-guessing that stuff is a bit beyond me...)

however, you can only fix for a relatively short period of about 5 years or so, and the lender then looks at it again (which could work for you or against you)

The good ol’ American J6P should therefore be sitting on his la-z-boy without a care in the world, then, in comparison!

this is actually true to some extent, with the exception of extreme bubbles like CA. Americans have traditionally been housed reasonably affordably on the whole compared to other countries, with easy access to fixed mortgages -- which is a little ironic for the supposed free-wheelin', free market exemplar (or maybe that's why) -- in contrast, Oz has bubbled everywhere that's habitable and usually uses ARMs to boot...

Brand,

not the number of houses, just the number of houses purchased in the last few years. And I am already very optimistically assuming that the long-time owners are all acting responsibly like myself paying down mortgage with no equity extraction for a Hummer, remodeling, or an Italian vacation, which I know is not the case.

One thing that shocked me a little bit about the Bay Area that I would not have known without being able to look up people's loan profile is, even long-time owners are mostly (over 80% based on sampling) on ARMs. I know this is not the case in other states. But it seems to me that borrowers here are very stretched, they cannot even afford the extra point or two for locking down the rates.

I am priced out of the market. Yes, I could make a payment each month, but I’d have to forego personal and retirement savings, plan to not purchase a new car in the next ten years, not take vacations, etc.

Jon, Jon, Jon,

No, you're definitely NOT priced out of the market. You just refuse to do things the way we True American Heroes are meant to do them. Yes, you SHOULD forsake retirement savings, a new car, vacations. You have no mettle. You have no sack. You haven't even mentioned eating ramen for dinner every night, for goodness sakes!

I would say UK is full of very stretched homedebtors.

Oz is a little bit different. The locals under 35 are stretched. Not the immigrants. Every year Oz imports close to 200,000 immigrants, a good 10% of its population. The no. 1 source of Oz immigrant is from UK, most of them arrive with a big dp from cashing out their little terrace home in an outer London suburb. The no. 2 source is China, and compared to the Chinese immigrants here, the richer Chinese (HK, Taiwan inclusive) tend to go to Oz, same with India. The reason being, Oz tends to import far more immigrants who have had plenty of working experience, so they arrive with their savings. The no.3 source is NZ, again, some of them arrive with money.

Therefore, DS, I actually don't expect housing price to dip a lot in prime Sydney, Melbourne, Brisbane and Perth, particularly not in inner suburbs well serviced by public transportation.

Brand Says:
DS, although we frequently disagree, I think you just nailed my primary gripe about ARM loans. That was a good way to say it.

maybe i should work at filling randy's shoes... yes, that's it...

seriously, how are we going to entice randy back?

skibum Says:
This brings up another quesetion about the details of these proposals - so would the proposed conforming loan limits be based on regions as specific as the Bay Area?

It makes my head hurt just to think about the arbitrage-fraud opportunities this will open up. Even if 'they' put some half-arsed safeguards to prevent people from arbitraging this, there will be an underground market to arbitrage "fha limit compliant" loans across these boundaries.

SP

OO Says:
Therefore, DS, I actually don’t expect housing price to dip a lot in prime Sydney, Melbourne, Brisbane and Perth, particularly not in inner suburbs well serviced by public transportation.

it's hard to know. this is the whole story of the bubble -- which areas will collapse first? my blog cites evidence that the western suburbs are already collapsing. the *expensive* areas are being propped up by huge profits going to business owners and CEOs etc, but wage workers on fixed incomes are hurting.

the other statistic of course is that 1/3 of houses are fully paid off, the rest have varying degrees of mortgage on them -- and may have been purchased before 2000 -- hence, not everyone is in trouble, or to the same extent. many generation Y'ers are just plain out doomed in terms of ever owning a home except by inheritance, another frequent theme on my blog.

I happen to live close in to Sydney, and was going to invest in inner Melbourne in 2000 -- only to have my g/f go off the idea and watch prices immediately ascend 50% in those desirable areas in the following 2 years in response to 9/11, low interest rates, etc.

Of course *pleasant* inner city areas are more attractive to investors and occupiers, the question is by how much should they go up, is the bubble truly a deflatable bubble, and will prices revert if rents can't cover outgoings in the long term? As oil becomes more expensive and runs out, inner city areas could become even more desirable -- a lot of outer suburbanites are hurting with fuel costs already. And naturally, the REI wants to see continuing high prices.

Should govt intervene, especially in an energy/resource crisis, and seek to reallocate ownership or control pricing when the people who bought shrewdly or expediently control all the best land near electric rail, etc? How are people to get to work? etc. The concept of individual title may have to be reassessed if things get particularly bad.

All these things are big cans of worms...

SP,

No kidding. This will only prove the truism that whatever well-intentioned "rules" the government decides to make, the primary result will be that people will find ways to get around them.

Let's see:

1) increasing the cap gains exemption for primary residence sales - result, flipping homes for massive profit
2) setting the "time requirement" for living in said primary residence to 2 years - result, serial flippers who move every 2 years! (Ever notice how many homes sold or on marked today were last sold in 2005?)
3) Relax qualification standards for mortgages - well, we know what happened there!
4) SarBox - let's not even go there!
5) (more trivial) - allow solo drivers in hybrids to drive in carpool lanes - result, everyone and their brother buys a damn Prius, even if the only thing "green" about them is the color of their poop after too much spinach.

It's human nature, why fight it?

Re: the original post

The government is NOT doing its best to make housing affordable.

They are only trying to keep debt-service affordable for Jane and Joe Howmuchamonth so this coiled spring doesn't snap back and smack their little ponzi scheme.

SP

The government doesn't care about the rif-rafs, it can't care less if the defacto bankrupt borrowers go back to being bankrupt again.

Some of the proposal are for political show and garnishing media coverage. I'd like to look at the government policy from the cost effectiveness perspective, how much bang for one vote.

There is no material difference in winning a vote from TX or CA. US government's main job is to keep as many Americans, not Californians, afloat as possible. Reducing the rate is a "fair" move to all Americans without bias of favor to one particular state. Raising the limit of conforming loan is not. The extra infusion caused by coastal escalated price helps only the coastal residents (who may not even be voting citizens). It has a very low bang for the buck ratio.

The Fed doesn't care about the housing market, it cares about the economy. Raising limit is a very clumsy and cost ineffective way to save the economy. Increasing government spending, building roads to nowhere, etc. are much better and efficient alternatives. Historically, governments never choose to bail out homeowners directly, this will not be an exception because history happened that way for a reason.

oo,

I'll counter that these loan limit change and bailout proposals are in fact coming from the coastal states. The players include Chuck Schumer (D-NY), Chris Dodd (D-CT), Barney Frank (D-MA), Barbara Boxer (D-CA), Nancy Pelosi (D-CA), and Gary Miller (R-CA). These toolbags are clearly pandering for votes. Folks in "flyover states" should be up in arms about the loan limit issue. It basically has nil affect on them, and they would in part be subsidizing the formerly jumbo mortgages of many Blue staters.

OO: "I think you are in a small camp of people with FRM Jumbo."

Sadly, I think you're probably right about that. Although I know I'm not alone - the house right next door was purchased in 2005, and according to PropertyShark the owner put 10% down, financed 80% of the price with a jumbo fixed, and financed the last 10% with an ARM. I can't tell any more than that, but I'd be surprised if it wasn't 30-year fixed, and the ARM is most likely not one of these ticking bombs, probably a 5/1 or 7/1. So she won't reset for a while, and when she does, the adjustment will only be to 1/9 of the total payment.

skibum: "would the proposed conforming loan limits be based on regions as specific as the Bay Area"

Just a sec, let me check my magic 8-ball...oops sorry, answer hazy, try again later. All kidding aside, who knows with politicians? I think the best bet would be to just bump the limit to 600k nationwide.

Brand Says:
DS, although we frequently disagree, I think you just nailed my primary gripe about ARM loans. That was a good way to say it.

maybe i should work at filling randy’s shoes… yes, that’s it…

seriously, how are we going to get randy back?

this comment moderating filter is nuts...

This one will require a jumbo - A real "doll house"

http://www.stockmania.com/2007_09_21_archive.html

The "government" thinks in terms of the next election cycle, just like many CEOs think in terms of the next annual report. It's not about what's economically rational but what's going to keep them in their jobs in 2, 4, or 6 years' time. Problems 5 years down the line are just vague abstractions and...they might be caught molesting a page or soliciting for public restroom sex by then.

To the extent that this is influenced by longer term thinking, it would be the lobbying arms of the mortgage and banking industries. Even then, it's not about a consistent policy, but money to get your local congress person through their next election cycle.

This country is run by corrupt idiots. Bush certainly made the whole matter worse with his economic illiteracy, but the miasma has been hanging around for a while.

skibum,

But the housing bubble did happen on Bush and the Republicans' watch, ditto fighting Bin Laden in Iraq, ditto alienating American allies, ditto destroying whatever budget surplus Clinton managed to save up, ditto zero oversight on military contracts to Cheney's former employer...

If you're looking for better alternatives than the Democrats, you're not find it amongst Bush's rubberstamper brigade.

@skibum,

Have I noticed it? Are you kidding me? I can't speak to the BA but a good portion of the homes on the market in OR are of the 2005 vintage! Clearly the 2006 non-builder inventory is distressed property and marketed accordingly. Coincidence?

astrid,

Wrong. The bubble 'collapsed' on Bush and the Republicans watch. Again, to not understand this is to not understand the bubble itself. We had this debate on the Portland blog and I can assure you that 82% of Dem's voted in favor of the 1997 Tax Law that paved the way to flipping as a lifestyle.

Patrick,

I couldn't agree with you more, this is the root of the whole problem. Maybe if we get through all the gnashing of teeth to less expensive real estate, the thanks of the younger generations will convince us of the current error of our ways.

Have to get there first, though.

Actually, sorry, not the error of our ways....

DinOR,

The GOP did nothing to quash the housing bubble and plenty to encourage it. They enjoyed much of the political benefits of people feeling wealthy from house value increases, so they deserve the blame as well. It's one thing to vote in a bad law not know the full extent of the problem, it's another to be the party in control and happily encouraging this bubble to grow and grow.

Furthermore, I am in no way persuaded that the $250K/per person tax exemption is the primary reason for the bubble. It played a role, but lax credit standards and lack of securities law enforcement played a much greater role.

DinOR,

Read my original response to Skibum. I did not exempt the Democrats from blame, I simply argued that because the Democrats were blameworthy, the Republicans are somehow exempt from great blame for the role in the housing bubble debacle.

If you’re looking for better alternatives than the Democrats, you’re not find it amongst Bush’s rubberstamper brigade.

astrid,

I don't mean to imply that my lambasting Dems on their asinine proposals that I'm letting the Republican administration off the hook. The Dems enacted much of the legislation that got us into this mess - i DO think the 250k exemption and the 2 year flipper time frame had a LOT to do with speculation, and Clinton's "great" plan to increase homeownership had a great deal to do with it, and current Dem bailout proposals are simply retarded. However, the Bushies have just been too busy lining the pockets of their Wall Street friends and bailing THEM out to worry about the actual real estate market.

Two words: Ron Paul

An interchange from the House banking panel meeting yesterday:
____________________________

Lucky for Frank, there was only one Presidential candidate at his hearing Thursday, though this '08 prospect wasn't buying into the morality play Frank was eager to sketch. Libertarian Republican Ron Paul of Texas complained that "abnormally low interest rates" -- including the Fed's rate cut this week -- led to a morally questionable bailout of Wall Street.

"We talk about market discipline, but there's no possibility to have market discipline," the candidate declared. "What moral justification do we have to deliberately devalue the dollar?"

In response, the cautious Bernanke left his own moral high ground for the safer moorings of policy commentary on the ills of inflation: "I agree with you that an economy cannot grow in a healthy stable way when inflation is out of control."

OT: Would you take a job offer from Linden Labs (Second Life)? Odds they will be bought out by Google at some point?