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This article on Bloomberg talks about Paulson and Bernanke wanting to increase the Fannie and Freddie market from $417,000 to $1,000,000. I’ve got a couple of reactions to that:
1. If Fannie and Freddie are currently bleeding money and we don’t really know how bad things are in their current portfolios and they don’t have enough capital (or it appears that they don’t) to handle the current loan pipeline and what do we want to do? Give them a larger portion of the mortgage market? Are we asking for trouble?
2. I’d love to see Fannie and Freddie start buying jumbos because I think it would unfreeze the jumbo market a bit.
So, what do you think?
The first problem is the implicit guarantee that Fannie and Freddie have. Do you really think that the US government will let them fail if something goes awry? I don’t think they would let them fail without a fight. This would be a taxpayer-money bailout. Prices have a long way to fall - why would we want to expose the GSEs (and by extension the taxpayer) to loans that have a better than 50% chance of going negative equity in the next few years?
Second, it means that the conforming limit is no longer about REACTING to economic factors but is now an attempt to DRIVE economic factors.
It is well known that the average Californian does not have an income that is substantially higher than other states where home prices are more reasonable. Californians are buying at higher price to income multiples. Driving the conforming limit higher is an attempt to sustain prices, not an attempt to increase affordability.
For the sake of the greater good, prices need to find their own level. Certain markets should not be singled out for special treatment.
The best way to set the limit would be to index it to median incomes instead
I, too, would like to see Fannie and Freddie enter the market for loans between 417,000 and 1,000,000. Current pricing for those loans for well-qualified borrowers is ridiculously high compared to conforming amounts. I think .375% to .5% difference in rate is acceptable, but 1% and over? Come on.
My only concern is if they can handle it financially…
Raising limits is OK as long as the LTV is kept low enough. No 95% plus loans for Jumbos! However, I doubt that FNMA is in a position right now without the removal of its imposed capital constraints to take advanatage of the jumbo market. They make more money off of multiple smaller loans than they do off of the bigger loans. In essence their short term working capital is limited.
Californina is really the jumbo problem. I think they should raise the limit in CA like they are in HI and AL. I have always witnessed that CA tends to lead the real estate and lending market. It needs and deserves to have the limits changed. Fix that market and I believe that the rest will play out in a less excited more natural order.
Patient Buyer makes a good argument but fails to understand that we already live in a complex area with many factors affecting the each market. California is a hugh market by itself. I am not mistaken the CA economy is amonsgt the size of some of the greater nations in the world. Its not fair that just becuase their citizens live in CA that they should have to pay higher interest rates and with stiffer guidelines.
The FHA legislation isnt going to help. None of the pending bills will help. I know that some of you absolute free marketist think that letting the s—- hit the fan it CA is a dose of good medicine. Obviously I think thats stupid. Our country has great resources. Its silly to believe that we got this way by totally depending on the free markets.
I agree Mike that CA is just one of the states where jumbos are just part of the everyday real estate market..like NY…
Every region in the USA has its “expensive” cities, where the average everday property well exceeds Fannie/Freddie. For all markets to benefit from the mortgage changes we need to include these cities, which are a great part of our economic base.
I am against raising limits in Calif. I have been in the lending business for 30 years in Calif, and I can tell you that incomes cannot support prices at these levels. Higher limits will not help affordability, but will only help keep prices too high. Prices need to drop to a level where people can afford the payments, taxes, utilities, insur over a period longer than 2-3 years, and….be able to live a normal life.
There is very affordable jumbo money out there, but not for subprime and 100% financing, as it should be. At my bank you can get a 10/1 interest-only loan to $2mm for 6.25% no points, no ppp, low fees, 60 day rate lock. The catch: decent credit and 10% or more down payment. If stated income (same rate), you need to have 6 months of your stated income in liquid (can be part of down) and reserves after COE.
Gee sensible—thats a great program. I am not sure how sensible it is though in today’s market. I am finding rates 150 bps higher than yours.
Jumbo is out of whack.
If people in CA can’t afford their loans under conventional pricing and guidelines than maybe they shouldn’t own their homes. But to say that they all should pay a jumbo penalty is reckless.
Perhaps you dont see that you are offering conventional pricing and guidelines to jumbo borrowers but you dont think its wise for other lenders.
Mike-
I have not failed to realize anything. I have correctly identified that there are no economic fundamentals that support price to income multiples in the 8-10x range.
You attempt to make the “California is Special” argument, which I am familiar with.
The prices in California accelerated due to buyer sentiment. Everyone is complaining that jumbos are priced “too high”. Who are you to judge this? Is it your personal money that is being lent?
Private industry nearly always makes better business decisions that the government.
Private lenders are asking for the higher rate on jumbos because there is extra RISK. When house prices are so far above fundamentals of income, especially with a growing likelyhood of recession in California, there are much higher chances of default. The higher rate compensates for the risk.
What you want is for the government to underwrite the risk. Prices in CA have a long way to fall. It is well documented that when homeowners go “negative equity” they have a greater incentive to default than those who have equity, since they realize no cash losses, especially with the new tax forgiveness.
Why should the government pretend that overvalued homes deserve the same rates as in less risky markets.
You realize that the increased risk will eventually be borne by taxpayers, right?
I am very weary of this type of bullying. A bunch of bad apples put us on the brink of economic catastrophe and then whine for government intervention, their justification being that it “isn’t worth” risking the whole economy just to punish the bad actors.
Is this not a clear message that you can get away with this type of economic blackmail as long as you make sure the problem is large enough?
I’m sorry, mike, but I feel that your bias as an industry insider who likely needs the real estate market to turn around is making you willing to throw any sense of free market justice under the bus to rescue your own interests.
People gambled and lost. It is not fair for the average taxpayer to have to prop up home prices in California.
Jumbos have higher rates right now because they SHOULD have higher rates. That is the will of those with money to lend. I’m sorry that it’s bad for business, but that is the way it is.
As Americans, we have become so craven and degenerate, that we cannot countenance, even for one second, the idea that perhaps we really deserve a good recession. We have lived far beyond our means, we have little personal savings, we buy everything on credit, we want it new, we want it big, and we want it now.
I have a great job in an industry that is very sensitive to recessions. If we have one, I may never be this well off again - ever.
But I care more about the moral hazard of constant bailouts than about my cushy little deal.
We can’t continue to reward bad investments, or else we will have nothing but.
/Rant off
do you feel better?
I am biased towards the industry. This is certainly true.
However with that said our govenrnment has come to the resuce many times to financial mishaps. We have the ability to tweak this and that to soften an unnecesary pain. The people of California are not 2nd to the rest of the country. It is beyond their control. We have a responsibility and right to adjust policy towards issues like this. Our govenment has been successfully managing financial disasters both here and around the world now for a long time. My goodness our county does ennormous good to help other countries to make mistakes. Should we help others but not ourselves?
Look at it like this….our country is a business. If we let the biggest division of our business collapse then its likely to cause unnecessary damage to the whole company. Whereas if we can adjust policy and apply special resources we can strenghten the whole system. California is too important to just let flounder because every home in the entire state doesnt get the same quality mortgage as fnma and freddie are offering to the rest of the country.
Regarding the risk….the people still have to qualify. They are just qualifying at a rate that is fair. The same people living in other states pay. This plan does not help those who can’t afford the home under fnma/freddie guidelines.
You also mentioned that Jumbo loans are risky. Thats mainly due to a limited jumbo market which most areas have. In the case of CA its almost all Jumbos. Therefore it is the norm and not a large risk at all.
Raising the jumbo limits in one state is not such a bad idea. Call it a bail out…Call it what you want. I expect our government to work over time in trying to fix it. I certainly don’t want the TOTAL DO NOTHING free market approach. The consequences of that approach would destroy our ability to have any contols of our selves. I want my government to govern smartly not do nothing.
Mike:
The US has experienced a huge housing bubble. Prices are much too high, and they have to come down, inline with peoples’ salaries.
This is especially true in California.
Having the tax payer foot the bill for $1M mortgages (by having Fannie & Freddie underwrite them) will not help prices decline back to their natural level.
Don’t you think home prices have gone up too much? Don’t you think they should return to their historical norms?
-anon
PS. Also, Californians can help themselves to make housing more affordable by simply building more houses. I live south of san francisco, and zoning means most houses are just 1 storey, and a few are 2. There is no reason most houses cannot be 2 stories, and a few being 3 — it would make it more like Berkeley, and Berkeley is a really nice place. This is about zoning, and it’s in our power to fix.
Wow, this is a good discussion. I love it when people can have an open and honest discussion of the good and the bad of differences in opinions.
A couple of questions:
1. Would California’s prices have gone up that high if it wasn’t for the hugh number of options arms?
2. Are prices that were supported by teaser rate interest only arms on stated income deals sustainable?
3. Can Fannie and Freddie really afford to start writing $1 million loans?
My opinions…
1. No
2. No
3. No
Mike,
The reason why housing prices went so high is because banks lent money to people who couldn’t afford the house. In a free market they would be punished by these reckless actions when the loans goes into default. However, because of sentiment like yours where we bail out people left and right, banks knew they were able to transfer their risk to the American Taxpayers. They knew that according to history, they can use the argument, “save us so that we can save the economy”. It’s a fallacy and you just bit and to your own admission it’s because you are biased.
How about you think long-term. The U.S. is going bankrupt. The money does not fall out of the sky, it comes from Americans becoming poorer. Moral Hazard will eventually bankrupt this country and reduce this country into a socialist state. You can slowly kiss your liberties goodbye in a socialist state.
No, we don’t have the resources to bailout anymore people. We are $9 trillion dollars in debt. We have future obligations of $70 trillions. We can’t afford anymore reckless spending!
A credit contraction to a tune close to a Great Depression is probable. This was all created by the banking system. Unfortunately, people will suffer, but it’s actually a healthy long term event because we will finally kill off some of the cancer in our economy. Any intervention such as the ones proposed by Paulson and the Fed, will only work against the exact people they pretend to be protecting.
Tom:
My answers to your questions are:
1. No — very low interest rates pushed prices up, which supported the low rates. Now that prices aren’t rising any more, the low interest rates don’t make sense.
2. No — teaser rates have low initial rates, which subsidize higher future rates. Unless prices appreciate, they don’t make sense, and prices are not appreciating.
3. Yes — Fannie and Freddie, aka the long suffering tax payer, can afford to write $1M loans. Why not, they pay for everything else? Would this let prices adjust back to reasonable levels? No. Should the average tax payer ($40K/year, does not live in California, owns a $200K house) subsidize the Californian tax payer ($80K year) so they purchase a $1M house? Also, won’t such a subsidy just flow directly to people who already own a $1M home? Doesn’t think just make life worse for that other breed of Californian, the renter?
Please keep in mind that the discussions were on the fed promoting increasing fnma/freddie limits to 1 mill everywhere. I suggested that they simply target California. Also the borrowers would have to qualify for a conventional loan. Most people believe that conventional guidelines are farily conservative.
I am proposing something more conservative than the fed is supporting. Also I am not lending in CA so it’s in my best interest to support the fed’ proposal.
Correct me if I am wrong but d I dodnt think taxpayer has ever had to bail out fnma and freddie on red cent.
The fed has to open credit markets again. Until they do that the situation will spiral further downward. Risky lending is basically gone. Underwriting guidelines have reverted back 1992 guidlelines.
Once again this proposal means that they would qualify for a conventional full doc approval to get the same rates as other people. If they qualify under the same conventional guidelines than I just dont see the risk outweighing the reward which is an improved credit market.
mike-
Your views are representative of everything that is wrong in America. Privatize profit, socialize risk.
Who the heck are you to judge what a “fair rate” is? The free market has decided that there needs to be a risk premium for high cost markets, because the values will likely decline further, increasing risk of default. Just as the free market has decided that prices are too high.
You try to confuse the issue by suggesting that I wish to make California subordinate to everyone else. No, I am suggesting that they do not qualify for special privileges. Let prices come down, and the conforming limit will no longer be a problem. It is the “special help” ideas that you suggest that will keep proces high and unaffordable.
And you think there isn’t a greater risk, well guess what? You are wrong. There is always higher risk when prices are higher multiples of incomes. That is economic fact.
I do not have the time or energy to give you the lesson on economics that you need.
Here is the short version, though:
*The GSEs exist to promote affordable housing.
*Affordable housing means a reasonable price and a reasonable payment
*Current jumbo rates are putting pressure on prices
*Lower prices increases affordability
*When prices drop further, those markets will be perceived as less risky
*Then lenders will offer jumbos at normal rates
*End of problem
Your proposal will punish the prudent and reward the imprudent.
And no, I don’t feel better.
Watching greedy people put their own interests ahead of everyone else never makes me feel good.
Personally, I try not to take pleasure in what is happening to the PEOPLE in this downturn, even though I am glad to see prices return to lower levels. That said, if people in the RE/Mortgage field have the propensity to think as you do, then I guess I maybe I should take some pleasure in seeing the financial sector take some well-deserved punishment.
I get it Patient Buyer. You want housing prices to come down to BENEFIT YOU.
Thats what this is really about isnt it Patient Buyer. Please don’t lecture me as to my greed as I am not a lender in CA. I only benefit if the rest of the country benefits.
I am not certain how my proposal punishes the prudent and rewards the imprudent. All I am suggesting is that some people in California deserve to pay the same interest rates as the rest of the country.
You sound very angry that our President, Treasury, Central Bank, Federal, State and Local governments are actually working to resolve this crisis.
You believe in doing nothing. Let the s— hit the fan and then you can beneifit in the unnecessary collaspe.
Again, I have absolutely NOTHING to do with Califonia. I am on the other side of the country. I do think that if the credit markets were to thaw back to semi healthy levels thats what is best for everyone. The only way I benefit is if the entire nation benefits.
Thank you for you efforts to educate me. However, I am a 20 year veteran of mortgage finance and I graduated with honors with multiple business degrees.
Again, my proposal is far more conservative than the Federal Reserve’s. However, when it comes to regulating and managing housing finance I will trust their opinions over yours Patient Buyer.
I don’t trust them either.
Nor do I support the government plan, nor do I care that your plan while ‘More conservative” simply screws everyone less. Thanks heaps.
As far as your education and experience goes, fat lot of good those credentials have done the wizards that have put our financial markets in such a mess. We have some real highly-credentialed people out there generating these massive write-downs in the billions of dollars. Rank-pulling won’t fly with me.
You are correct - I want the government to keep its corrupt little hands out of the free markets other than providing regulation and oversight. They usually succeed at that. They seldom do a good job when they try to micromanage the economy.
Did you know that Countrywide (who may end up insolvent) borrowed 51B from FHLB? Where you think that money comes from? I’ll give you one guess.
Fannie and Freddie are in huge trouble, and you can rest assured that if it gets bad enough, the government will find a way to bail them out, whether it is called a bailout or not.
Since the US government is broke, more debt will be issued to fund these bailouts. This will pile even more debt on future generations, who are not even old enough to vote right now. Let them pick up the tab. You and I will likely be in the old folks home while they slave to pay off crushing debt. Nice.
You seem to think you have a “gotcha” on me because I am waiting to buy a house.
Nope. I’m waiting because I think that the economy may slide into deep recession, and want to feel that out first. I can easily afford a house right now.
You said:
I am not certain how my proposal punishes the prudent and rewards the imprudent. All I am suggesting is that some people in California deserve to pay the same interest rates as the rest of the country.
Explained above. There is no free lunch. Prices are still too high relative to incomes.
Allowing the GSEs to write million dollar mortgages will simply reduce their capital at a greater rate, and expose them to more default risk, due to the fact that there are additional price declines to come in CA.
The rate is not the problem. Let the seller drop his price enough and the net result will be the same payment. The private lending market demands the higher rate for a GOOD REASON. They expect greater risk. They are far smarter than the
government leaders who have a different agenda. Why expose the taxpayer to that risk?
You said:
You sound very angry that our President, Treasury, Central Bank, Federal, State and Local governments are actually working to resolve this crisis.
You believe in doing nothing. Let the s— hit the fan and then you can beneifit in the unnecessary collaspe.
Have you studies what happened in Japan? Endless government do-gooderism prolonged their housing decline far longer than it needed to. You really need to look into this to understand. The collapse will come either way, I promise you. It will be worse with meddling.
Your greatest assertion, that I am after my own interests in this is null and void, here’s why:
I expect every government and Federal Reserve action to make the situation worse. In fact, read the most frequent post on this very blog for some insight into just how this happens.
Therefore, if I wanted a cheaper house, I would be happy about what will be their bungling. I have cash saved up and no debt. The worse they make the problem, the better off I am. I win either way. Either justice is done, or I get a cheaper house. I prefer a just outcome to my own naked self-interest. The government will fail, as it usually does, and I will likely get a house at a price lower than I deserve. Oh well.
But I would rather that the free markets cleanse this mess out quickly - which they will if they are allowed to do so. But no, the do-gooderism will insist on spreading the pain around “fairly” (meaning everyone suffers, even if they were not involved), the banks get bailed out, a few homeowners get helped, and we once again subsidize bad behavior.
That’s the American way now. Accountability is dead. Let the grandkids pay.
I appreciate the ideals of a Total Free Market system. However, it’s not a remote possiblity. Basically it has about snowballs chance in hell of happening. There are way to many influences in the world. Big money and big power exist.
Weather you like it or not they will make changes. Some of them will work and some wont. But the system will be improved. This is how we have built the biggest and most powerful county in the world.
I just wish all of this negativity and panic would just calm down. We have other housing downturns and over extending periods in our history that have been far more devasting on our economy. Study the housing market of the the late 1980’s and early 1990’s. Look at the consequences that were suffered and what happened after it settled down. The sky is not falling.
The housing prices in CA are going to fall. Whether or not fnma/freddie raise the conforming loan limit in CA.
And once again….I dont know if the taxpayer has ever had to pay 1 red cent bailing out fnam/freddie.
Now please lets agree to disagree.
Patient Buyer presents the best argument (though that in itself is counter productive to creating balance). He says it best to the affect that we are blind to our own greed so much that we make the most irrational decisions just to suit our individual needs (speaking for most). We get caught up news and all of its propoganda that only aim to achieve one thing…selfishly excluding others that share the same amount of space and purpose on this planet.
We are killing ourselves and shortening the lifespan on this planet by forgetting the one true thing that matters most…living for the moment and freeing ourselves of the past. Stop, look and listen. There is a solution to all problems but we much learn to create the space necessary to build awareness and INCLUDE everyone as one in the same.