Do you ever think that sometimes the answers to problems are so obvious that it's shocking that others can't see it? Today on http://www.cnnmoney.com/ there is an article entitled Housing Woes Hit High End. It's all about how the luxury home market is now being adversely affected by the sub-prime meltdown. It feels like the fairy tale The Emperor's New Clothes, in that Fannie Mae and the other GSE's (government sponsored enterprises) are overlooking the obvious, easy solution to aiding the Jumbo mortgage market.
The rug has been pulled out from under the Jumbo mortgage borrower for irrational reasons. These borrowers have been lumped into one big pool of non-conforming buyers with the same borrowers that were using 106% financing, had no income verification and no asset verification. In the matter of about a day or so, these very desirable borrowers were suddenly outcasts.
How does a borrower go from looking like this?...
To looking like this in the minds of lenders literally overnight?
Often times these are people that have a significant down payment to put down on a home (usually at least 20%, but often times more), a verifiable income, verifiable assets and good credit scores. So what turned them into pariahs in the eyes of lenders? They were looking for a loan of over the dollar amount that Fannie Mae has deemed as "conforming" which is currently $417,000.
Fannie Mae bases its conforming loan rate on October-to-October median home sales, but uses an irrational national average instead of a more accurate local average. However, Fannie Mae makes exceptions to this rate in Alaska, Hawaii, Guam and the U.S. Virgin Islands by increasing the conforming rate by 50%. If Fannie Mae were to localize their median home sale rates, or at the very least categorize higher areas such as New York and California (for example) in the same manner as Alaska, Hawaii, Guam and the U.S. Virgin Islands, there would be conforming loans in areas that are now falling mostly into the Jumbo category.
Why would an area that has virtually no homes even listed for $417,000 have the same conforming loan limits as the areas where most homes are listed significantly higher than $417,000? It just doesn't make any sense. And what makes Alaska, Hawaii, Guam and the U.S. Virgin Islands more worthy of a higher conforming rate than other higher priced areas of the country?
You have to also question the mob mentality of the investor market. After all, why would they rather buy a loan from a struggling buyer who is stretching to take a loan of up to $417,000, when they can buy a loan of a financially established buyer who can easily afford a loan significantly higher than $417,000?
The solution seems simple to me. I'd love to hear from everyone, particularly mortgage brokers, as to why this solution never seems to be mentioned as a possibility.
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