Conforming Loan Limit Increase - Why not?
Chuck Ponzi February 4th, 2008
There is a lot being tossed around about the stimulus package that is being shuttled through the house and senate. One of the proposed amendments is the slackening of the conforming limits, especially in an area of high housing prices. Most other bubble bloggers have stood against this, dismissing it as another affordability enhancing intended vehicle that will only keep prices above what a normal buyer should be able to afford. I’m going to break from that camp for the following reasons:
1. I feel that a seemingly arbitrary limit of access to credit imposed based on a nationwide median price is unfitting for high-cost and high-income regional areas.
2. Affordability is the issue, and indeed, I feel it should be addressed. I would rather see a local median-income based payment cap, along with mandated dti (debt to income) ratios.
3. Even by expanding the current set of available products won’t help the already under water homeowners, nor does it change the economics of the rent/buy equation. Basically, it has little or no impact to the bubble. If you can rent long-term in a high-priced area, why shouldn’t you have access to credit?
4. The bubble was created by speculation and “affordability products”. While nothing occurs in a vacuum, the bubble is not going to be reinflated without new affordability products and lax lending standards; something that is not going to happen in this environment.
5. Indeed, I believe that like many speculators caught up in the positive frenzy of the real estate market, it is easy to be caught up in the pessimistic view as it tumbles. One sign of the bottom is when everyone agrees that the product is no longer worthy of investment, and to be shunned. We still have a long way to go, but there is no reason to overblow the risks and rewards.
In the end, creating more access to credit does not translate into overpriced homes. Most of the problems created have already been solved in the debt market; a return to sane underwriting is already underway. The pricing of housing is inconceivably out of whack, but will plummet for the next 2 or 3 years as the imbalances are worked out.
Besides, the current jumbo market is in disarray, adding sane underwriting to that market while not increasing the GSE’s limits can provide competitive air to the otherwise broken market.
This is not to say that it won’t have its faults… with a limited amount of funding going on, the GSEs will likely need to ration the available funds. Price, however, is most often the best rationing device one can create. Any way you look at it, the bubble has burst, nothing will change that. In case you haven’t noticed, I’m not left-leaning that I believe everyone should be able to afford a house. For many people, they have no propensity to be natural caretakers for an asset as costly and long-term as owning real estate. Many of those people are already in homes they can barely afford, or worse, dashing their credit on the rocks of the “American Dream”; which up until 30 years ago was about starting their own business and succeeding financially, not owning a home. Consider how far we have strayed from the path of free enterprise.
They are all up in arms over this at Piggington. I think that the concern is that they will ease the GSE conforming standards as soon it is obvious that they are too strict for the majority of FBs who will want this.
I don’t think it will work either since this would effectively make the Govt the primary Mortgage underwriter in the US as opposed to the private sector. No one will buy the securities knowing that they are garbage.
I’m all for free capitalism, but know that there are some services better handled by governments. The important question is whether a person’s civil liberties could be compromised if the government “crowded out” other competitors in the market place. I believe they could, so I don’t see a logical reason that the Government should be a lender at all. However, I believe that there are certain natural monopolies that exist in economics; more than most will admit to.
But, California will nearly always be more expensive to buy a home due to the favorable climate, and job opportunities that seem to be present for the foreseeable future. Why should Californians have to pay 25% higher rates?
In the long run, it won’t matter, after market disruptions, someone comes in to provide support. It’s just a matter of time and at what level that support comes in at.
Chuck Ponzi
Raising the conforming amounts will not ease the situation in California. It’s been stated over and over about affordability and “very creative” loans that drove this market for years. It’s an intersting conversation piece around the water cooler when you ask your co-workers if they can afford their home they bought 5 years ago….you can bet what the answer is and most (not all) cannot put this logic together and still feel they are loosing something??? We bought in 1995 and did sell in 2005 and feel very good about the current situation and will wait out the market until prices fall in line with incomes. Why buy now @ 10-15% downward adjustment, the property tax is still based on an overstated amount and only complicates what will be a bad economic situation for most city/county districts. So raise the conforming amounts with tighter lending standards and see what happens….. average incomes cannot support 25% annual real estate appreciation!!!! Short sales and foreclosures will begin to drive the market prices and as most successful business people will say “if you can’t move the product, your price point is not set right”.
I agree that the plans proposed are flawed. It is also the philosophy that is flawed. Every time government gets involved with setting nationwide standards, they fail. As you bring up regionality is a big factor. The problem was not created by one area of real estate. It was not the actions of over zealous sales people in real estate, mortgage lenders, home inspectors or greedy buyers. All these and many other factors conspired to create the bubble and destroy the bubble. Did any one clamor for the government to get involved while everyone was making a killing?
What is wrong with letting the market place work itself out. It will be painful for some in the industry, but nothing is better that a flushing of the system to get things back to a clean professional way or operating. I read 18-24 months of this rapid fall in housing prices. It would take the government 12 of those months to saddle everyone with some new have baked regulations that will only add to the cost of doing business. All we have to do is look at the last bubble and its gang of over zealous executives and see what the government did to help out. Now there are new accounting regulations that have drowned small companies and compounded the problems of medium and large corporations. The government can help by getting out of the way.
I was wondering about the GSEs and the alleged bailout. Does the government really back the GSE bonds? Or does it just provide working capital to the GSE?
I guess that would explain the nature of the beast a bit more.
I suspect people are going to find out the bonds were far less of a sure thing than advertised.
Neither,
GSE’s were created by the government to provide liquidity to the home market, nothing else. They are privately owned, and the bonds are owned by investors.
The implied guarantee may turn out to be nothing more than a pipe dream if the fit hit the shan, but I’d be willing to wager that Congress would step in if the GSEs were to fail. They truly are “too big to fail”. Even with the portfolio caps.
I’ve struggled with the concept of needing this kind of effective market “grease” without the explicit government oversight.
Either way, the real issue is the bond insurers. If they lose their ratings, effectively all of their bonds go down with them. I wouldn’t be surprised to see a depression after something like that. Remember, this is all a confidence game. Nobody believes it will fail. Anyone gets a whiff of risk, exits will be packed so fast, you won’t be able to find a way out yourself. The entire investment community of the world would be brought to its knees. No joke.
And today we are seeing the claims the GSEs are taking on too much risk according to OFHEO.
You know Chuck; I am not against having incentives or rewards to housing investments. However, its a delicate balancing act.
http://money.cnn.com/2008/02/0.....ahoo_quote
Perhaps its later in the game then we thought.
Oh, my other question is how come the insurance guys were allowed to become so leveraged?
The bond insurance guys are headed to default as soon as someone defaults? How stupid is that.
I’m not sure a collapse of M3 would be all that bad of a thing (in retrospect of a 30-40 yr time span).
I also rememeber my grandfather speaking about the depression. He seemed to remember people who had even small amounts of cash stashed away did OK. People in debt were crushed.
I’m in debt with a car loan….
I am a realtor in the Phoenix area. I think you capture correctly that there are various solutions and bandaids being offered to quell the issues with the market but that these are solutions more based on getting future properties to transact rather than dealing with the number of properties that are in trouble or heading into trouble. For instance, raising the conforming limit here conceptually makes it more affordable and easier for buyers to buy more expensive properties. However, it doesn’t talk to the larger decline in values and serious buyer hesitation and concern that property prices will drop substantially further.
In a nutshell, this market is purely price-driven now. Outside factors like federal government actions and lender actions (to reduce interest rates) aren’t enough to move it away from that.
Thanks for interesting reading. Dave Lorti. For insights on the Phoenix market, see http://www.davelortihomes.com
Chuck, I love your blog, but I disagree with the position stated in this thread.
To paraphrase Abraham Lincoln, if you were to call a tail a leg, how many legs does a dog have? Of course, the answer is 4. Regardless of what you call it, a tail is a tail, a leg is a leg, and a tail is not a leg. Dogs have 4 legs.
Similarly, if you were to call what is defined a non-comforming loan today a conforming loan tomorrow, would bond purchasers be happy with returns indicative of a lower risk security?
The answer, of course, is no.
The fact of that matter is that asset backed paper secured by $700,000 mortgages has more downside risk in the current market than asset backed paper secured by $417,000 (and lower) mortgages.
If you don’t compensate buyers of that paper for the additional risk, it will pile up at Fannie Mae and Freddie Mac. Not only will this have a negative impact on what is defined as conforming today, but it will make taxpayers the ultimate bagholders for FBers everywhere.
Chuck,
I’m not sure how to contact you…
Please go back to the previous design…this new one isn’t pleasing to the eyes. If it ain’t broke, don’t fix it. Sorry for the bad review.
Take care and keep up the good work,
John
It’s all about the election year nothing more. It is another temporary fix by this administration to bandaid a problem and not resolve it just to dig in and stand the ground as they go down.
I can’t wait for the next presidental election and I suspect the people are gonna come out in droves tired by many things gone wrong in US economy, housing, jobs the war.
Until we have a new administration and plans that will work we just kinda stumble and try to see the good and bad in the situation.
I think you raise some important issues… I tend to agree with most of what you have brought to light.
Your statement, “2. Affordability is the issue, and indeed, I feel it should be addressed. I would rather see a local median-income based payment cap, along with mandated dti (debt to income) ratios.”, is one issue in particular that has caused much of the nationwide foreclosures.
I think the access to credit is obviously important in high income/high cost housing markets. When we peal the onion it comes down to family budgets. Can you afford a $3,000/mo. mortgage for a sf home? And after you make that that said mortgage payment on a monthly basis, do you then have cash (not credit) left over for groceries, gas, electricity, phone, food, clothing for your kids, maybe a car payment or two and some money left over for savings or fun? My theory is that in OC the answer to this question would surprise most people. Increased access to financing from $417K to $729K means that now people can. But does it mean that they should?
The other very interesting question that another commenter raised above is property taxes. I am very interested (to know what the bursted bubble in OC is going to do to the school districts. The makeshift school buildings are evidence enough that California lacks sufficient investment in education. But with less property tax revenue being collected by the county over the next several years, what impact will this have on educational facilities and communities? I guess we’ll just borrow more money at credit card rates to tide us over?
Markus,
If your not a California resident, the Governator has already started the tumble by asking all government sectors to cut back spending and defer funding for many programs in a mid-year change in current spending. Although it’s still unclear what & how much of a cut in spending he’s looking for or needing in the coming years….?? Right now the state is @ 15 Billion deficit for their budget. Check this site for details: http://www.cbp.org/ and you will see that much of the cuts come by way of the schools and medicade programs. It will create some real challenges in our state economy as the job market is also seeing the unemployment rates creep up with the recent issue of the mortgage lenders and those involved in the construction industry. I also read an article on the MSN website indicating that their was a recent surge in people who were now tapping their 401K plans to keep them afloat…(the main article used an individual located in Irvine, California) this is pretty scary that folks are having to pull money from their retirements in order to make their monthly living expenses during the prime working years.
Thanks for this. Exactly what I feared. And what do these education cuts do to property values when Cal public schools, ranked 43rd in the nation, sink to depths below that of Mississippi’s? Housing public, credit crisis, state budget crisis, education cuts. It’s like a perfect storm from hell.