I suggest cautious optimism for those of us in the real estate industry in high cost real estate markets like California and the San Fransico Bay Area. Here are two of the most common questions for the proposed conforming loan limit increases passed by Congress and expected to be approved by President Bush next week:
How will the new amounts be priced? The law impacts loans originated after July 1 of last year. So do you remember all those jumbo loans for $500 or $600 or $700k that were purchased by Citi, Chase, Wells, etc.? Per the proposed law, these loans can now fall under FNMA & FHLMC guidance. Owners (holders) of these mortgages are "testing the waters" in terms of pricing in the secondary market. If there is little investor acceptance, rates will stay high. If there is investor appetite, rates on these high-balance loans will improve. It is anyone's guess. Please note that the law "encourages" these loans to be securitized - it does not require it! So no one knows the answer yet. Time will tell if Wall Street investors are willing to purchase mortgage backed securities in high cost (high risk) real estate markets...
What is the schedule? President Bush needs to sign the legislation. That may happen this weekend, or sometime next week. I doubt any large investors will announce a policy until he actually signs the document. And even after that, pricing may be unknown due to questionable investor acceptance.
In the text of the proposed law, it mentions section 302(b)(2) of FNMA's charter. If you are curious, here it is: http://www.ofheo.gov/Media/Archive/docs/reports/fnma.pdf
Here is the exact text of the law:
SEC. 201. TEMPORARY CONFORMING LOAN LIMIT INCREASE FOR FANNIE MAE AND FREDDIE MAC.
(a) Increase of High Cost Areas Limits for Housing GSEs- For mortgages originated during the period beginning on July 1, 2007, and ending at the end of December 31, 2008:
(1) FANNIE MAE- With respect to the Federal National Mortgage Association, notwithstanding section 302(b)(2) of the Federal National Mortgage Association Charter Act (12 U.S.C. 1717(b)(2)), the limitation on the maximum original principal obligation of a mortgage that may be purchased by the Association shall be the higher of--
(A) the limitation for 2008 determined under such section 302(b)(2) for a residence of the applicable size; or
(B) 125 percent of the area median price for a residence of the applicable size, but in no case to exceed 175 percent of the limitation for 2008 determined under such section 302(b)(2) for a residence of the applicable size.
(2) FREDDIE MAC- With respect to the Federal Home Loan Mortgage Corporation, notwithstanding section 305(a)(2) of the Federal Home Loan Mortgage Corporation Act (12 U.S.C. 1454(a)(2)), the limitation on the maximum original principal obligation of a mortgage that may be purchased by the Corporation shall be the higher of--
(A) the limitation determined for 2008 under such section 305(a)(2) for a residence of the applicable size; or
(B) 125 percent of the area median price for a residence of the applicable size, but in no case to exceed 175 percent of the limitation determined for 2008 under such section 305(a)(2) for a residence of the applicable size.
(b) Determination of Limits- The areas and area median prices used for purposes of the determinations under subsection (a) shall be the areas and area median prices used by the Secretary of Housing and Urban Development in determining the applicable limits under section 202 of this title.
(c) Rule of Construction- A mortgage originated during the period referred to in subsection (a) that is eligible for purchase by the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation pursuant to this section shall be eligible for such purchase for the duration of the term of the mortgage, notwithstanding that such purchase occurs after the expiration of such period.
(d) Effect on Housing Goals- Notwithstanding any other provision of law, mortgages purchased in accordance with the increased maximum original principal obligation limitations determined pursuant to this section shall not be considered in determining performance with respect to any of the housing goals established under section 1332, 1333, or 1334 of the Housing and Community Development Act of 1992 (12 U.S.C. 4562-4), and shall not be considered in determining compliance with such goals pursuant to section 1336 of such Act (12 U.S.C. 4566) and regulations, orders, or guidelines issued thereunder.
(e) Sense of Congress- It is the sense of the Congress that the securitization of mortgages by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation plays an important role in providing liquidity to the United States housing markets. Therefore, the Congress encourages the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation to securitize mortgages acquired under the increased conforming loan limits established in this section, to the extent that such securitizations can be effected in a timely and efficient manner that does not impose additional costs for mortgages originated, purchased, or securitized under the existing limits or interfere with the goal of adding liquidity to the market.
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Hi Glenn, please see my answers to your questions below.
Pete Sabine
You've received a contact message from your Contact Form on the ActiveRain network.
Message details:
From: Glenn Roberts
Email: glenn@inman.com
Subject: Conforming loan limit increases
Pete,
Hello. I am a real estate estate reporter for Inman News and I am interested in speaking with you about the temporary rise in the conforming loan limit and whether you have fielded any questions from current or prospective clients about the impact of these changes.
I saw your posts at the ActiveRain.com site.
Some questions:
1) Will the rise in the conforming loan limit actually delay some closings, as consumers may wait until the new limits are in place before buying a home (waiting for a better deal on their mortgages)?
I have not experienced a delay in closings because consumers are waiting for a better deal. We are experience buyers waiting to purchase a home to see if the new limits will provide a more affordable mortgage.
Have you seen any transactions where this has occurred?
I have a client looking to purchase a home this year in the $800k to $1.1m price range. He is waiting to move forward with a home purchase until the details of the conforming loan limit increase are confirmed including any potential savings from lower interest rates. Overall, there is no sense of urgency in most of the high cost real estate markets throughout the US as home prices have leveled off or are declining and mortgage interest rates are stable.
2) Is there any consumer confusion about what this will mean for them and how the changes will aid them in buying a home? What is the first question you typically get from consumers about this?
Glenn, there is a lot of consumer confusion regarding the impact and perceived benefits of the conforming loan limit increases. Additionally, there is a fair amount of confusion with real estate agents and lenders, as well. If the real estate pros are confused and cannot articulate the pros and cons to their clients, how will the consumer become knowledgeable or confident in an uncertain economy and real estate market?
The first question usually asked from the consumer is how low will interest rates be adjusted for loans above $417,000?
3) What impact do you believe these changes will have on your own business?
Our number one challenge in high cost real estate markets like the San Francisco Bay Area are increasingly tightening loan underwriting and property appraisal standards. If Fannie Mae and Freddie Mac can reliably handle the significant increase in their existing burden to create liquidity in our banking and home loan lending system by purchasing loans originated in high-cost and declining high-risk real estate markets and rebuilding the confidence in the secondary market for mortgage backed securities purchased by Wall Street investors, interest rates should remain affordable.
I am skeptical that Wall Street is ready to come back into the jumbo loan market until the sub prime fallout and multi-billion dollar banking and investment firm loss write-downs have subsided. Its very difficult to assign a value in risk (interest rates) until our lending standards have been reformed to protect investors. I speculate that the increase in conforming loan limits will require a tiered interest rate system for jumbo loans, which in reality is no different than the previous threshold interest rate pricing of conforming (less than $417) and non-conforming "jumbo" (over $417k) loans.
My concern is that higher conforming loan limits could have a reverse effect of higher rates and even tougher qualifying standards. Last week, Countrywide Home Loans created five categories for all counties with the states of California and Nevada. Countrywide underwriters are required to co-relate qualifying and property appraisal standards for the location of the property. Category 5 is the highest risk category. My county, Contra Costa, is a category 4. This rating system is too broad and general as it pulls in cities within stable micro-markets and ties them to communities in the same county with softening declining markets.
Will these changes be enough to stimulate home sales or are more changes needed?
It's too soon to tell. I like the concept of temporarily raising conforming loan limits with a specific expiration deadline. By doing so, the deadline can create a sense of urgency encouraging buyers to act now versus waiting for rates and values to drop. However, the temporary time frame is a two-edged sword that most likely will discourage Wall Street from purchasing mortgages securitized by Fannie Mae/Freddie Mac until the deadline has expired, at which time is most likely to be when the sub-prime fallout has been worked through with new found transparency and stability in the secondary marketplace.
Do you expect they will have an impact on home-price depreciation/appreciation?
The actions taken to mitigate the impact are like closing the barn doors after the horses have left the barn. The primary issue is that incomes are not high enough to afford the monthly payment for an expensive asset tied to financing under traditional underwriting standards. The lending industry abandoned these traditional underwriting guidelines to create loan products for borrowers who otherwise could not afford to purchase a home at our current value levels. Borrowers were "qualified" on initial loan teaser rates of 1 to 2 percent instead of the fully indexed (par) rate of 6 or 7 percent. All of this increased the buyer demand by at least 40 to 50 percent.
Simple supply and demand dynamics aided by a huge population of under qualified buyers drove real estate values to unprecedented levels. Current traditional lending standards have eliminated at least half of the potential buyers in the market and thereby reducing demand for a supply that is growing exponentially by the same under qualified homeowners defaulting on these teaser rate loans.
This is no different than the lease versus buy financially phenomena in the auto industry. The advent of a lower monthly payment using a lease instead of a fully amortized purchase loan payment has allowed car buyers to drive expensive cars they could not qualify for using a purchase loan. The added demand from the increase of "qualified" car buyers have inflated the cost of a $13k Camry to almost $40k. Without auto leasing, the cost of automobiles would be about 35% lower than current values.
I am convinced that real estate values are most likely to deflate because of a "financing bubble". Raising conforming loan limits alone is not enough to solve the problem without liquidity in the credit markets (Wall Street).
One additional solution is to increase the loan term from 30 years to 50 years for all existing adjustable or interest only loans at the point of which the loan "resets" (usually at the end of year 5). Currently the existing loan balance, which in most cases has increased from its original sum because of negative amortization, is recast on a 25 year term. This recast on a shorter term added to the higher market interest rate at the time of the reset is the leading cause of foreclosures, short sales and bankruptcies.
4) Would you favor more permanent changes in the conforming loan limit for your market area. If so, why?
I would like to see a permanent change in conforming loan limits in my market area because the loan limit for FHA is directly co-related. FHA financing offers some very attractive home purchase and refinance programs and should have a significant impact in stimulating our real estate market especially if the revised conforming loan costs and/or qualifying standards lock out potential home buyers. I recommend that you read the article on my Active Rain post regarding the modernized FHA loan programs.
5) Currently, what types of properties are still moving in your market area?
Entry level properties such as condos and starter homes have modest sales activity. High-end "trophy" homes above $2m seem to do well as buyers in this league have significant incomes and assets which enable their immunity to prevailing economic and real estate market conditions. We are beginning to see an increase of sales activity with bank-owned foreclosure properties and motivated sellers facing foreclosure or bankruptcy. There is an increasing volume of desperation in our market and sellers who are not in dire straits face stiff price competition from affected motivated sellers. This is not the market for sellers trying to "test the waters".
Who are the current buyers?
Buyers who can document their income, assets and job stability with minimum FICO credit scores above 680 and non-contingent upon the sale of another property. If they are not in this league, they are not for real.
What types of properties would you expect to see the most demand for once the new loan limits are in place, and how do you expect buyer demographics will change?
The higher loan limits will allow more buyers to use FHA financing which will open up the bottom rung of the real estate food chain, entry level properties. This should enable young people to convert from renting to home ownership. Rents have risen at least 10% in the last year and there is a cross over point where renters will be motivated to purchase their first home.
Thanks much for any help.
Let me know if there is a good time to talk today or feel free to reply by e-mail.
Sincerely,
-Glenn
. . . . . . . . . .
Glenn Roberts Jr., deputy editor
Inman News, www.inman.com
(800) 775-4662 x137 or
(510) 658-9252 x137
FAX (510) 658-9317
glenn@inman.com
1480 64th St., #100,
Emeryville, CA 94608
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