0 Senate Passes Conforming Loan Increase!

As part of the overall Economic Stimulus package the Senate voted and passed the provision within the bill to expand the conforming loan limits to allow Fannie Mae and Freddie Mac to buy conforming loans worth as much as $729,750 for loans made between July 31, 2008 and Dec. 31, 2008, an increase over the current $417,000 loan limit, a move that could help struggling homeowners to refinance jumbo loans at a lower interest rate. It will also allow the Federal Housing Administration to insure loans as high as $729,750 in expensive markets. To find your areas median home value visit the National Association of Realtors site. They have the most user friendly numbers.

This should be a welcome boost to home sales within the price range of the 125% upper limit for median value of a city. We don't expect a dramatic improvement in 30Y jumbo loan rates, most analysts are speculating that rates might improve by as much as .50% compared to where they are now. Historical low jumbo loan rates are available now on 5Y, 7Y and 10Y fixed most clients are locking in rates in the low to mid 6% area. This is down from the mid to high seven percent range over the last few months. The jumbo market most improved by the congressional action is likely to be the 30Y fixed as investors(banks, foreign investors, etc) don't have a great appetite for 30Y paper so they are demanding higher rates than what one would expect.

The conforming loan limit change doesn't happen till mid summer. For those in falling markets looking at their neighborhood drop in value it is wise to consider your refinance options now as equity is the most important factor in lending. To get the best loan terms your loan balance should be no more than 80% of the value of your home and of course having great credit gives you access to the best jumbo loan rates.

Detail: Senate Passes Conforming Loan Increase!

0 Conforming loan limit increase, two steps away.

Rates for some long-term mortgages are at their lowest levels in four years, the Federal Reserve is expected to cut some short-term interest rates Wednesday and proposals in Congress may soon allow thousands of jumbo loan borrowers to qualify for loans with lower interest rates.
The industry has not seen demand for jumbo mortgage loans at these levels since 2003.

Should you refinance?
The answer depends on a variety of factors: your' current loan terms, how long they plan to stay in your home, how much equity you have, your credit scores and more. It's deeply important to sit down and understand how all the pieces play together.

Help for the jumbo loan client is on the way. Economic stimulus legislation approved Tuesday in the U.S. House of Representatives includes a provision that would temporarily allow government-sponsored mortgage finance companies Fannie Mae and Freddie Mac to increase the conforming loan limit up to $729,750. The new conforming loan limit change is being anxiously awaited by all market participants as it is seen as the best part of the stimulus package. People are not excited about a check for a few hundred dollars when the prospect of not being able to refinance is real for millions of prime borrowers in adjustable rates who have little to no equity. The new requirements at most banks is to have at least 10% equity at the time of purchase or refinance. The new conforming loan increase would allow up to 100% loan to value.

Traditionally, the gap between conforming and jumbo loan rates has been narrower. What the credit crunch has done is led to, effectively, a buyers' strike among investors that buy jumbo mortgages because they are not backed by an implied government guarantee like conforming loans. Until more investors opt to purchase bonds backed by jumbo loans, the wider-than-normal gap in rates will remain. The best rates are available within the 5 and 7Y fixed jumbo mortgage rate programs. Thirty year fixed money remains higher as investors don't have the appetite to lend large balance loans on a fixed basis in this environment. Investors believe rates should and could be higher in the future so they are offering ARMs. Many banks don't offer any 30Y fixed as a result of the interest rate risk.

The short-term rate-cut the Federal Reserve was expected to announce Wednesday would not have any direct effect on long-term jumbo mortgage rates, although it will affect rates for things like home equity lines of credit and consumer credit cards. Nonetheless, news about Fed actions often prompts homeowners to take action. This is especially important if home values have been soft or falling in your area as equity is more important in a refinance than FICO score for most large balance scenarios.

If Congress makes that change, possibly by mid-February, banks and investors will be inundated with refi business, we have seen a dramatic increase in applications since the Bush gave his economic stimulus speech two weeks ago and the stock market tanked following MLK Jr day. There is a window that's going to be there; we don't know how long it's going to be there and are advising clients to lock at these levels. Don't get greedy by holding out for a rate that may never come as falling values create a situation where clients rates are substantially driven by their lack of equity. Get a package in place right now. I would not wait. Good candidates for refinancing: having equity in your home.

With property values declining in so many markets, the main thing to look for is whether the equity is there. Those who have at least 20 percent equity in their home - that is, their loan balances are equal to 80 percent or less of their home's market value - will have the easiest time refinancing. In areas that some lenders have designated as "soft" or "declining" markets, where home values are sliding, borrowers must have even higher levels of equity before lenders will approve a loan.

Also factoring into the "to refi or not to refi" conundrum this time around is whether borrowers measure up to the newly tightened underwriting guidelines. The most competitive rates are available to those customers with credit scores of 720 and substantial verified assets in bank/brokerage accounts. Borrowers these days also need to be prepared to provide proof of their income and assets, and sometimes tax returns.

Refinancing might not be advisable - or possible - for homeowners with impaired credit, or those who can't provide documentation of their income, or who have little equity and live in what can be determined as a declining market. It is far better to know your choices now than to procrastinate and find out that recent home prices and lending guidelines prevent you from refinancing your jumbo mortgage. Look for the Senate to vote and Bush to signoff by mid Feb.

Detail: Conforming loan limit increase, two steps away.

0 Conforming Loan Limit Increase and other ways to revive the patient.

It's always nice to take a step back every once in a while and try to see the bigger picture of what has happened in the past, and where we are right now. In my mind, when I do this I see so much stimulus injected into US economy and institutions and we aren't even in a recession yet, at least not in the minds of the organization that will ultimately declare it; the NBER. On a positive note, with the latest stimulus package there will be a temporary increase in the conforming loan limit for homebuyers; a positive incentive for those who both intend to purchase and can afford to purchase a home, especially here in Southern California where 50% of all jumbo loans are found. These jumbo loan changes should help affordability and ultimately help reduce record setting inventory in formally hot markets. Everything and anything can sell at the right price, econ 101.



Lets just list what stimulus we have seen since late 2007:

a) 175 basis points of cuts to fed funds rate; 1.75%

b) Cash injections into Merrill & Citigroup

c) Buyout of Countrywide Financial; whose stock price today is trading below the buyout price

d) Mortgage Rate Freeze Plan

e) Talks of Bond Insurer Bailout Plan; $15 Billion to cover Hundreds of Billions in potential losses, think of the failed Super SIV rescue plan that also boosted banks when announced

f) In Europe, bond bailout of Northern Rock by gov't to incentivize private takeover

g) Economic Stimulus Plan For Housing; make mortgages easier to get & cheaper

h) Economic Stimulus Plan For Biz; tax breaks

i) Economic Stimulus Plan For Tax Payers; checks to 117 million Americans

I'm sure I am missing a bunch of other cash injections to individual banks/brokerages, but am I missing any other major stimulus thus far? I think I got most of it. Now, again, there is still a debate about whether we are in a recession or not right now as chances are we won't find out until later on anyway. But forget that for a moment. Look at that list above! Are we really to believe that the economy is in fine shape with all this stimulus going on? How could we simply ignore the reasons for all this stimulus in the first place!

It's encouraging to see things happening, but will it all work? Will it stop defaults from rising? Will it cause more bubbles? Will it encourage a moral hazard and future reckless behavior? Will it stop housing from falling? Will it fix the credit markets? Will it fix the toxic waste holdings held on the books of financials? Will it really save the bond insurers? Will it stimulate consumer spending and consumption? Will it bail out those who made awful decisions? So many questions. So little answers!

With all this stimulus, it's not surprising that equity markets are bouncing here; but what I'm interested in is will this fix the problems we face without causing any future bubbles/inflation problems? Is this delaying the inevitable washout? All open for discussion as I wont give any predictions with so much uncertainty out there.

On a side note, the conforming loan limit increase moves the limit from $417,00 up to $730,000 until December 31st! The number varies per area based on 125% of median home values. The median in Los Angeles for example is just south of 500k. I think this is overall a good thing for client's but it does come with some question marks. Here are my thoughts:

POSITIVES: cheaper jumbo loan mortgages & cheaper fees for those serious buyers who have every intention of buying a new home. May increase purchase price budgets a bit with savings from taking on non-jumbo loan; hopefully with caution by the buyer not to exceed affordability. The experience of all the foreclosed families may prevent reckless buyers who decide to purchase based on this incentive alone but cant really afford it.

NEGATIVES: incentivizing homebuying by cheaper loans, how is this any different than what got us into this mess to begin with (no doc loans, option ARM's)? What happens if someone who is on the cusp of affording to buy, gets convinced to purchase due to this temporary offer? Will this setup future problems of distressed sellers should we indeed enter a recession? Will it really bring MORE buyers into our marketplace OR convince prospective buyers to increase their budgets dramatically thus rendering the investment unaffordable?

Overall, I would have think this is a positive for our marketplace. Since most people put max 20% down, and most condo buyers like to put only 10% down, we are looking at a target group of sub $785,000 for single family homes, and $695,000 or so for condos.
It will help those that have every intention of buying to 'pull the trigger'; hopefully without upping their budget too much! That's the only downfall I can see; over leveraging via a higher loan amount due to the projected 1% savings on the rate of the new conforming loan limit increase.
Where are we at in the real estate cycle and overall credit cycle?























Or is this the chart?:

Detail: Conforming Loan Limit Increase and other ways to revive the patient.