Lower conforming loan limits back to 2007 levels? Whose bright idea was that?

Another cluster **** from a government reeling from one uninformed decision to the next. It seems every time you turn around someone from the administration is bemoaning the state of housing in the country today. Housing has pulled us out of 6 of the last 8 recessions - why not this one? 

Why? Because Washington says one thing and does the complete opposite. Or one branch does one thing while another branch acts to negate the first (see: PACE Program). Is it any wonder confidence is at record lows? If you people are going to screw up, at least do it consistently so we can move forward with confidence that you'll continue to screw up the same way - we can deal with that. It's the multiple levels of screw-ups and misdirection that has us lost.

For those of you that live in the middle of the country, I know it makes no difference. It's not your fight. But at least get out of the way for those of us that do have a dog in the fight, OK?

Here's a primer - prior to 2007  GSE loan limits were low. Even though we were in higher cost California, for our county it was about $355,000. Some very high cost areas got 115% of the median price of the market up to $417,000 and some areas as high as $525,000. Problem was, in 2005 - 2007 the median price for a home in our state was approaching $600,000. In our little backwater, medians were in the low $500,000's for 2 years. That meant that anybody coming to our area COULD NOT GET a conforming loan for even a median price home. They were increasingly pushed into the jumbo market with higher fees, tighter qualifying and higher interest rates. Use of FHA and GSE backed mortgages plummeted from as high as 55% to around 7% by mid-2007. 

But where there's a problem, there's also an opportunity so lenders came up with ways to address people's inability to get conforming loans by inventing a whole new category of loans - the exotics. And it worked so well, they kept inventing new features. Can't qualify for an Alt A or subprime, how about if we ask for '0' down? No? How about interest only for 3 years? Still don't qualify? How about if we just tell you how much you need to make in order to qualify and then you tell us you make that much? Better?

And the GSE's saw their market share falling even more and the geniuses on Capitol Hill saw that that was bad so just as things started to implode they made a corrective move to increase conforming loan limits. Had they done that 3 or 4 years earlier while maintaining the relative quality of the loan qualification process, we would not be in the trouble we are today.

Now many of the same geniuses who got us into the problem are charged with getting us back out. And they look at the higher loan limits and see that very few people are using that higher limit today. Duh. So their conclusion is not that they tanked the market, but that the higher limits must no longer be needed. And many Republicans are against the higher loan limits because they see this as a way to 'reduce governments stake in housing'. Great time to be worried about this, ya schmendrakes. Why not just drive that stake right into the heart of the market while you're fiddly-farting around trying to make us believe you actually have principles.  

YOU DULLARDS! First of all, you are absolutely killing any nascent move-up market that may be starting to percolate. In my area we're down from $500,000 to $355,000 as a conforming cap and sales of $400,000 - $600,000 homes, which were damnably slow to begin with have dried up completely. 

It is true that it has not impacted the broader base of our business because our median price has fallen from the mid-$500's to the high $200's or low $300's. But what about when the market snaps back? And it will. It always does. Even Obama can't kill the innate drive for the American Dream of Homeownership. So what happens in my little market, or the broader California market, or the other 593 higher cost counties in 42 states when the median price again creeps over that cap? 

Well, lenders are working on a solution to that even as we speak. The only question is - what are they going to call sub-prime next time? That name's probably played out.

Of course that's just my opinion. I could be wrong.  
 

 
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25 Comments on What'll they call subprime loans next time around?

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OCT
24
2011
872,158 Points 47 Featured Posts Localism Sponsor Attended Rain Camp Called Shot Master

Gene, the Senate voted today to extend the limits where they are - now it has to get through the House. I can't really tell if you if you are for or against this, but I think it's a good thing.

Sharon
8:24pm • #6
223,259 Points 35 Featured Posts

Steven - the bill actually passed the Senate with all the D's voting in favor and 8 R's. However it faces an uphill battle in the House which is dominated by R's. Our lobbyists, the Mortgage Bankers Assoc and others have been working very hard to get this extended. Not sure yet what the benefit will be of the new GSE refi proposal. Safe to say it will not help those most desperately in need of help but some of us might at least be able to refi into a lower rate.

Gregory - If you've seen your market plummet while the politicians dance you'd get my rant. If your home market had been dubbed 'ground zero' for foreclosures, as mine was, while Barney Frank was proclaiming the soundness of the system, you'd understand my point. And if your market was already bumping against the ceiling of the lower limits and you could smell disaster brewing just like it did before, you'd grab a trumpet and join the band.

Always love a good debate Coral. As the song goes - I ain't often right but I've never been wrong (Jerry Garcia).

8:25pm • #7
223,259 Points 35 Featured Posts

F & S - I'm all for it.

Andrew - while I agree that to some upper end buyers it won't make that much of a difference, it will make a difference to many. And our move-up market, which had just started to see some signs of life has shut down again not necessarily because of the dollar amount but because of the perception that the administration is only giving lip service to the housing recovery. It's the uncertainty that's killing us and this is just one more step along that road. My son just had a transaction today where the difference between a conforming and jumbo mortgage was severe enough that the buyer will be coming in with another $100k just to stay conforming. Not everybody has a spare 100k laying around right now.

8:35pm • #8
145,762 Points 17 Featured Posts Called Shot Master

Gene, Great Post! If you want gov't programs then you have to deal with the "clowns" that make the rules. My wish would be for them to get out of the way completely, but for now the market needs the GSE's.
8:39pm • #10
223,259 Points 35 Featured Posts

Michael - Agreed. The government has never been as involved in our business as it is today and our business has never been this screwed up. Unfortunately they have interjected themselves in it and the withdrawal needs to measured and when the market strengthens, not chaotic when the market is at it's weakest.

This is part of a letter posted by Mortgage Bankers Association (and former Realtor and former FHA head) Dave Stevens to Congress recently:

MBA President and CEO David Stevens urges Congress to reinstate the increased conforming loan limits that expired at the end of September; upon expiration, conforming loan limits in many high-cost areas fell from $729,750 to $625,000, which MBA said hampers the ability of many borrowers to obtain FHA- and government-sponsored enterprise-backed mortgages.

"The reduction of the FHA and GSE loan limits formula from 125 percent to 115 percent of median area home price will impact approximately 593 counties in 42 states," Stevens noted. "Additionally, the reduction of the limits in high-cost areas will affect approximately 75 counties in 13 states. The MBA urges the Senate to act quickly on this extension to prevent further damage to our nation's housing market."
8:44pm • #12
124,250 Points 3 Featured Posts

I really enjoyed your perspective, sense of humor and authenticity. Can we please work together to get housing put of this mess..because as you said..Even Obama cant kill the AMERICAN dream of home ownership!
8:54pm • #13
865,595 Points 18 Featured Posts Localism Sponsor Attended Rain Camp Called Shot Master

An interesting post and I'll be back to follow the discussion. 
10:49pm • #14
152,333 Points

History will certainly repeat itself. 

It always does.
11:42pm • #15
OCT
25
2011
395,891 Points 5 Featured Posts Outside Blog Attended Rain Camp

Subprime had nothing to do with conforming loan limits...  SUbprime had to do with lower credit scores, lack of down payment, and alck of income (thus total debt ratio was measured).  A $550,000 purchase price, with 20% would've put somebody at $410,000, which is below the conforming loan amount back then.
Subprime use to have a demarcation at eithe $750,000 or $800,000 or $1,000,000 depending on the lender.
12:24am • #16
395,891 Points 5 Featured Posts Outside Blog Attended Rain Camp

Gene, I'd bet if you peeled the onion back a little, you would see that Murietta had a TON of owner occupied loans placed on properties at 100% financing when in fact these homes were not owner occupied.  I would also suppose you'd find there were the same mortgage brokerages and/or real estate brokerages that put these borrowers into these homes-- IF IT WAS NOT INDEED THE LICENSEES THEMSELVES TAKING OUT THE LOANS!  How many  home listed as short sales are vacant?  Why?  Because they were rentals.
Everywhere I've looked in CA, Riverside Co., San Bernadino, Stockton, Vallejo, Merced, Modesto, Fresno, etc. that has high foreclosure rates, there were a lot of crooked mortgage brokers and agent.  Vegas was the same.  Texas got lucky probably due to the sole fact that there were no 100% cash out refi's allowed.

Wall street got the wrong signal, as long as those loan apps were for owner occupied.  Of course, not totally wrong as they turned a blind eye, and probable knew what was going on, but as long as they were making money and could dump the loans, it was all fine.  The worst part of government in this whole mess is that nobody has been arrested, and TARP money was paid so the Banksters could pay themselves bonuses.  Why did they keep the guys who caused this mess???
12:34am • #17
177,169 Points 7 Featured Posts Called Shot Master

I know they will start to do the subprime stuff again at some point but I had to wonder when that will be!? My last transaction was so touch and go. I was waiting for them to ask for his underwear size and his extended family tree and this person was very well qualified and made good money!
1:00am • #18
2 Featured Posts Outside Blog

Oh Gene, this administration HAS consistently screwded up!!!
5:20am • #19
1,452,702 Points 46 Featured Posts Outside Blog Called Shot Master

One of the reasons for the foreclosure mess is sub prime lending. I am glad they have stricter standards.
6:04am • #20
1,499,364 Points 353 Featured Posts Localism Sponsor Outside Blog Hit Router Attended Rain Camp Called Shot Master

Gene...

A market was created in 2007 that produced borrowers who became buyers of houses that became foreclosures. And apparently, we didn't learn a thing from that!
8:24am • #21
704,009 Points 56 Featured Posts Outside Blog Called Shot Master

First it was a B/C Loan then it turned into a subprime mortgage... Before this admisistration there were taxes, now it is revenue...In 2012 there subprime will morph into Lollipop loans and also in 2012 you can vote for Obama and 4 more years of economic pain and suffering for most of America and receive a lollipop for your vote. Why you ask, because what is the other word for a lollipop? (Sucker)
9:03am • #22
368,026 Points 6 Featured Posts

Gene: Thanks for the post. I know that Congress is talking about raising the loan limits again. They let them expire as you know. The rest of the market is going to take a while to come back. The other piece of good news is they may let people refinance if their loan was done before 2009 and they are upside down. Of course, they need to be currrent on their payments. All of this takes time. I was talking with a realtor yesterday and she heard there is still up to 5 years worth of shadow inventory out there. If that's the case, a normal market is a ways off. The good news is the market will turn and those of us still in the business will reap the rewards. Thanks!
9:15am • #23
838,124 Points 69 Featured Posts Outside Blog Called Shot Master

In a important realm such as Real Estate, we should not practice trial and error, but precise business...The government does not know what it is doing and becomes part of the problem before long...That's SOP
10:16am • #24

Gene:

Well said.  It should be a requirement that anyone who authors legislation designed to regulate the business we're in should serve a year's intership actually LEARNING how the business REALLY works.  Only then will a legislator be truly prepared to author legislation that makes sense...

Thank you for your post - entertaining as well as thought provoking.

Linda

 
10:27am • #25
269,182 Points 72 Featured Posts Outside Blog

You're pretty much right. We can keep beating the "it was the CRA rewrite that started it all" but that's water under the bridge. The problem, and you know this, is politicians are just people. Some of them are brilliant, many are complete dumbasses and most are corrupt - at least to the point of doing anything they can regardless of outcome just to get elected again. It's not about doing what is right for the country any more. It's all about doing what each individual representative can do to hang on to that seat for the rest of their lives because it transforms them from sh*tty people to magnificently wealthy.

Barrack Obama is a socialist shill who could not care less about you, the housing industry and capitalism and evidently a majority of voters are just that stupid.

Next ...
10:37am • #26
223,259 Points 35 Featured Posts

Always good to hear from you Ken.

I think one of the points many of you have made is that the government is really incompetent to deal with these issues yet they proceed to do so anyway with all the incumbent unintended consequences. We have snapped back too far in response to this crisis with regulations and requirements that severely limit the opportunity for even well qualified people to purchase a home. The incidence of foreclosure is not statistically different for buyers with 0 down, 3% down or 20% down. It's how you qualify the buyer that you're giving the loans to.

Gary - actually Murrieta had a ton of owner occupied homes that were actually owner occupied, We were/are still a hotbed for fraudulent activity but that was a minor part of our market back then. Our biggest problems came from 2 sources - between 2001 and 2006 we were the fastest appreciating area in the country at 155%. As a result people were rushing to get into the game and those that came later bought way more than they should have. Lenders (and Realtors) knew there was no way in hell these people could afford that home but rigged the books to get them in - BECAUSE THEY WERE MAKING MONEY. As soon as the market hiccuped theses buyers were the first to get hosed off. Then there were all the people who had owned homes for awhile and decided to take advantage of their equity build-up every 6 months and ATM'd every nickel out of the place and more. They were the 2nd round to get hosed off.

Now we're stuck with some of the truly unfortunate that could hang on for awhile but not forever, and the strategic foreclosure folks, and those who know they can live payment-free for 1 - 3 years before the bank comes after them. This distressed market will be with us at least into 2015 according to most prophets and most of what the government has done has only served to stretch out this period rather than address the issues and stabilize the market.

4:32pm • #27

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