Increasing the jumbo mortgage limit

NEW -> Contingent Buyer Assistance Program
There is the possibility that this move will hurt the market. The GSEs are not getting any additional funding to buy these loans, so each jumbo loan they purchase takes up two transactions for those further down the ladder. This could have the effect of harming the entry level market and thereby slowing the chain of move-ups even more. To "rescue" the housing market, the government needs to be increasing funding for loans at the bottom of the market not the top. This was, after all, the mandate for the GSEs when they were formed.
 
"A point is not worth $75K or $500 month though. Maybe $8K upfront or about $50 a month right? Please check my math, I am a lawyer."



depends on how you look at it



if you saying a point is 1% lower interest than it would on a $600k loan lower your payments by $280.- and save you $135k in interest over 30 years



but if you saying a point to buy down interest rate, that would get you about 1/4% better rate
 
Okay IHBer's gather around, it is time for graphrix to review risk based pricing for MBS. As some of you know, I kinda know what I am talking about, not always being a nutter and all, but for the most part on this subject, I do. For some of the newer people, I recommend doing a search for some of my posts on this subject. In fact, in my 2000 comment thread I referred to a post about risk based pricing, and ironically that was before the subprime blow up and it basically predicted what would happen. Also, I highly recommend reading the <a href="http://calculatedrisk.blogspot.com/2007/07/compleat-ubernerd.html">three posts on MBS from Tanta</a>.





First, you have to understand that most jumbo loans have been underwritten by Fannie Mae or Freddie Mac guidelines, since well before the August crunch. Granted, there may have been a few exceptions made, but for the most part they had to "conform" to the same guidelines as "conforming", except that the loan amount was larger. I am not talking about ALT-A, I am talking about plain ol' A-paper jumbo loans.





Now, come August investors no longer wanted jumbo loans, and the pricing skyrocketed. It has since come back down to a more reasonable spread compared to conforming, but the spread is still higher than normal. What this means, are the investors want and are demanding a premium for the amount of risk they are taking on. The defaults on jumbo loans has increased significantly, and this is not just a subprime/ALT-A problem. It is a problem, that people can't afford their mortgage.





So here is what happens... Fannie raises the loan limit to $625k. Woo hoo! The bottom is here, everyone can buy home now, YAY! Oops... sorry about that, I had a kool-aid flashback there. Well, when Fannie does this, and they price the loan the same as all their conforming loans, when they go to sell it, the investors will balk. They will say we aren't buying that crap for that price, we have been buying it for the last two years, and it is crap. So, Fannie will have to take a loss on the sale, since they can't get the price they thought it was "worth", and now they will have to raise the risk based pricing. What does this mean? They have to add a risk based fee to the loan amounts above $417k. Just a guess here, but lets say for loans above $417k to $525k, there is a 100bps hit in fee, and for loans above $525k, there is a 150bps hit in fee. The hit is in the fee, or the yield spread, and not the rate.





What that looks like today, at one wholesale lender (and, this isn't to discuss what rates are and where you can find better, but for consistency of pricing. If you want to discuss rates, then there is a thread for it, but not here.)...





A conforming loan up to $417k, would have a rate of 5.75% for 0 points.





A conforming loan between $417k and $525k, would have a rate of 6.25% for 0 points.





A conforming loan between $525k and $625k, would have a rate of 6.75% for 0 points.





So, look at it this way... a $625k loan at 5.75% would have a payment of $3647 (roughly an income of $205k to qualify), and at 6.75%, would have a payment of $4053 (roughly an income of $220k to qualify).





Is it just me, or does increasing the loan limit look like it won't do sh*t to help the market? Or, do I just sound like a nutter? It's okay to call me a nutter, I am used to it, but a nutter who has been right is better than being normal and wrong.





And, do not even get me started on how this really hurts the GSEs capital requirements, that they are already on the brink of breaking.
 
<p>Great point graph, and I'd like to add this....</p>

<p>Investors have not even been buying 95% of the jumbo loans originated since August, anyways. Originating banks aren't able to sell the loans, so they are keeping them as "held-for-sale" on the balance sheet. I can confirm that this is indeed the case with Indymac, WAMU and Countrywide. I agree with you that wall-street firms will not want to buy these loans because they won't get a high enough return out of them. The reason why we have this credit market problem is because wall st sold over-rated investments to yield hungry investors like state pension funds etc... How the hell can they sell a LOWER yielding MBS bond in this market?</p>

<p>If Fannie and Freddie CAN actually sell them off, they will need to be at higher rates. Anyone who has read the OFHEO statements will know that this hasn't been "integrated" into the pricing platform yet. Translation: no idea as to what rates would be yet. Its really a no-brainer--all things the same a higher loan amount should command a higher interest rate. The reason why this "no-brainer" was ignored in the past was because the originating lender was completey ignorant of the risk. All they cared about was making money off the origination, so a larger loan amount meant higher profit. Why do you think all those jumbo loans got refinanced with NO FEES?</p>

<p>This idiocy shows you how stupid and moronic our congress and administration is. Why bother to have an oversight committe to govern Fannie and Freddie if Congress can just over-rule them? The GSE's don't even have enough capital as it is with the limit at 417k! This isn't about helping anyone other than brokers, banks, and wall st firms.</p>
 
<em>Translation: no idea as to what rates would be yet.





</em>Sadly, that says everything I just said, but in a much better and simple way.





A thumbs up thank you does not do your post justice, so thanks LM, you just helped confirm my point.


<em>





</em>
 
Fannie and Freddie MBSs are very different from bank MBSs because they carry a guarantee. Investors will probably buy Fannie/Freddie securities for roughly current conforming rates because the risk to them is essentially identical. The question is what will the GSEs charge for the guarantee and what will happen to them as a result of the terms they offer. Presumably they need to charge almost as much as the spreads. If they offer less, they will go under - although perhaps some time in the future.



Of course the immediate issue with the GSEs is what's the cause of the spread? Are jumbos really that much riskier? Are banks overcautious. Or, most frighteningly, are the GSEs charging too little for conforming loans? It's possible the GSEs will be de facto broke by the time they finish writing up rules to do jumbos.
 
Not to thread jack, but does anyone have any links on default rates of A quality jumbos vs. A quality conventionals? Are jumbos really riskier from a % of defaults perspective? Obviously they are riskier in whole dollar terms because they are larger.
 
<p>Thanks for the information, graph. IHB's "official" snack?</p>

<p><img alt="" src="http://farm1.static.flickr.com/58/153442427_6a0d842e7e_m.jpg" /></p>

<p> </p>
 
<p>Snicker. Tanta is already talking about the hubbub the MBS traders are having over having a bunch of Jumbos shoved into their nice slow to refi pools. Net result, they want increased risk premiums. And that means higher rates for all! :-)</p>

<p><a href="http://calculatedrisk.blogspot.com/">http://calculatedrisk.blogspot.com/2008/01/traders-dont-put-jumbos-in-my-tbas.html</a></p>
 
<p>Interesting comment over at <a href="http://lansner.freedomblogging.com/2008/01/25/tell-us-will-stimulus-save-oc-housing/">http://lansner.freedomblogging.com/2008/01/25/tell-us-will-stimulus-save-oc-housing/</a></p>

<p><cite>clemente</cite> Says:


><a title="" href="http://lansner.freedomblogging.com/2008/01/25/tell-us-will-stimulus-save-oc-housing/#comment-46113">January 25th, 2008 at 7:46 pm</a> </p>

<p>Cross posted from Calculated Risk comments section:</p>

<p>For the time being, the GSEs are living by OFHEO’s rules on capital (haven’t heard that we’re throwing those out yet) and the reality is that they are having trouble just holding on to what they have on the portfolio now. Given how they account for their derivatives, it is almost certain that they will have to raise more capital after they print their Q4 numbers. Ceteris paribus this crowds something else out of the GSE portfolio or draws capital away from some other mortgage portfolio.</p>

<p>The GSE have dramatically scaled back the amount of IO/high LTV/Low FICO/etc higher risk loans they are doing as a result of the capital constaints (to say nothing of the way they have performed). The GSEs are not in a position to wave a magic wand and save the housing/mortgage market.</p>

<p>I was at a mortgage credit conference today and there was a very strong consensus that these jumbo lite loans would not be pooled with conforming loans. The best guess was that this move might cut the current jumbo/conforming spread in half.</p>

<p>Of course, the Paulson/Pelosi/Bonehead troika didn’t stop to think about any of this, nor did they think about how they would sieze up the jumbo market while this plan works its way through Congress. When the market got wind of this, prices on jumbos hit the floor because no one wants to hold them knowing that jumbo holders will have a much stronger propensity to refi when this gets put into place. So if you want to know why jumbo rates jumped 50 BP yesterday, you can think our august leadership in Washington.</p>

<p>Brian | 01.25.08 - 9:34 pm</p>

<p> </p>
 
It continues to astound me that folks think that the government can somehow make homes more affordable or help the economy to be more prosperous by making or changing laws.
 
<p>They sure can make us less prosperous.</p>

<p>The congressmonkeys have, of course, absolutely no knowledge of how that, or any other industry works. And how can we expect them to? I am/was a real estate atty, and knew my side, but had no idea what happened after the loan got sold the first or second time; only learned all that from reading IHB and Calculated Risk in the last 6 months. I, however, understand that there's a lot I don't understand and try not to go there.</p>

<p>So let us imagine, just for a moment, that all our congressmonkeys are persons with the high intelligence of Socrates, wrapped up with Einstein and Hawking and the soul of Buddha, and the sneaky political subtilty of Elizabeth the First. Yeah, yeah, get off the floor after laughing, this is a THOUGHT experiment only.</p>

<p>The 535 of them, together with their aides, also highly intelligent motivated pure of soul, honest, who intend to go into monasteries after polical service instead of lobbyist firms, do NOT have the collective intelligence to deal with all the issues that come their way, and they do NOT have the knowledge and experience to deal with it either.</p>

<p>So I think that what we have here, is the exposure of a crisis of governance. When the founders started things, they did the best they could with what they had at the time, and I daresay, the constitution has improved with many of the amendments. But the founders did not imagine, and could not imagine the complexity of the country they founded now.</p>

<p>But I think the governmental pie has to be divided up differently. And it also has to be arranged so we have people who are more like my ideal congressperson, and less like congressmonkeys trying to run for office. </p>

<p>Anybody got any ideas other than:</p>

<p>Limiting gov't very severely so the minds of the congressmonkeys are not too severely taxed. I don't think this is a good idea, given that the crisis was partly caused by a lack of regulation.</p>

<p>If such tests exist, a test to make sure they're at least not perverts or sociopaths.</p>

<p>IQ tests.</p>

<p>Yet another branch of congress, equivalent to the House of Lords, made up of the 2 or 3 best of the top 100, 200, X industries. Said branch would have the ability to veto no more than X acts of Congress a year. Wouldn't have to meet; would be done by e-mail. Would be elected by all persons employed in that industry, no matter where they lived. By accepting this commission the persons would be prohibited from ever being president. These veto persons would hold office for a long time, or until their industry lost its place in the queue.</p>

<p>This might reduce the bribery/campaign contributions problem.</p>

<p>A constitutional amendment allowing the line item veto.</p>

<p>Other suggestions?</p>

<p> </p>

<p> </p>

<p> </p>
 
<p>A hard cap on spending that you can enforce for elections and a tripling of salaries for elected officals?</p>

<p>I can dream can't I?</p>
 
Congress can definitely do things to make us more prosperous. If they'd kept Glass-Steagal, or restricted predatory lending *before* the crash, or supervised all the phoney finance like they do banks, we'd be a LOT more prosperous now, with much better prospects too. To the tune of over a trillion dollars. There were substantial constituencies for all the above reforms, they just lost out to the deregulation mania.
 
<p>If they'd have done that then the housing boom would have peaked and ended in 2002/2003. The pull back would have started then and we'd probably be right about bottom now. The economy as a whole wouldn't have received 4 years of equity extracted heroin hits of consumer spending.</p>

<p> </p>
 
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