Jan. 25, 2008: did they raise the conforming limits or not? And mortgage rates continue to worsen

Jan. 25, 2008: did they raise the conforming limits or not? And mortgage rates continue to worsen Rob Chrisman

As part of the economic stimulus package, an increase in the conforming limit could now be a reality, at least for a brief period. Congress and President Bush agreed, but have not voted yet, on a 1-yr increase in the conforming loan limit to $730K. There is not a lot of detail yet (there is confusion as to whether the $730K, or $725, is for high cost housing areas, or everywhere, and just what high cost areas are?). Just when mortgage originators everywhere were breaking out the Cold Duck, OFHEO’s director James Lockhart (Office of Federal Housing Enterprise Oversight, who oversees FNMA & FHLMC) issued a statement saying “We are very disappointed in the proposal to increase the conforming loan limit as we believe it is a mistake to do so in the absence of comprehensive GSE regulatory reform.  To restore confidence in the markets we must ensure that the GSEs’ regulator has all the necessary safety and soundness tools. Yesterday Chairman Dodd talked about moving a GSE reform bill early this year.  We are ready to work with him and the Senate Banking Committee.  We will also be working with Fannie Mae and Freddie Mac to ensure that any increase in the conforming loan limit moves through their rigorous new product approval process quickly and has appropriate risk management policies and capital in place.â€

Now what? Frankly, analysts feel that enactment is possible by mid-February but looks more likely by early March. No large investors will make any policy changes or announcements until the issues are less confusing, or even voted into law. Apparently, the bill would temporarily increase the limit on mortgages Fannie Mae and Freddie Mac may securitize from $417k to up to $730k. In addition, the bill would increase the limit on loans the Federal Housing Administration (FHA) may insure from $362k to $625k. This should help to reduce spreads in the jumbo mortgage market! One estimate mentioned that as many as $400-500 billion in loans could qualify for refinancing. As these loans refinance, it could ease pressure on capital-constrained bank balance sheets. And “temporary†items like this are difficult to rescind after a year, which would also be good news for originators.

Here in California Gov. Arnold Schwarzenegger wants Congress to raise the Fannie Mae and Freddie Mac lending limit from $417,000 to at least $625,000 as part of the economic stimulus package. State Assemblyman Ted Lieu is pushing for a bill that requires mortgage lenders to tighten up already strict guidelines to make sure homebuyers can afford their basic monthly bills before qualifying for a mortgage loan. This bill would also ban certain designer mortgage loans such as the option arm mortgage. The option arm mortgage, also known as the pay option arm, allows borrowers to pay less than the interest that is due by adding the unpaid interest to the balance of the mortgage loan. The bill would also allow some homeowners to refinance their homes without being responsible for any penalties or unnecessary fees.

Aren’t rates supposed to go down when the Fed cuts the overnight lending rate? Not necessarily. Yesterday they shot up again as Initial Jobless Claims held close to 300,000 for the second week in a row, causing some economists to believe that the labor market has renewed strength. Existing home sales fell 2.2%, to 4.890 million in December as buyers remain on the sidelines waiting for prices to bottom and financing to become more attractive, and median home prices continued downward, falling 6% from last December. Housing inventories fell, with homes for sale -7.2%, suggesting that frustrated homeowners are starting to pull their homes off the market. The economic stimulus package is designed to do just that: stimulate the economy, which raises fears of higher rates ahead. Mortgages originators were in locking and selling, perhaps as much as $5 billion for the day.

Today prices are worse again to end a very volatile week. The 10-yr is up to 3.74%, and 30-yr conforming prices are worse by another .250. With no economic releases scheduled, investors will be grappling with an emergency Fed rate cut and next week’s potential cut, a US economic stimulus plan, and confusion about conventional loan amounts’ impact on the market. It appears that loan agents will be telling stories for years to come about “The Tuesday they locked in their client after the Fed cut…†Hopefully rates slide back down!

When I was married 25 years, I took a look at my wife one day and said, “€œHoney, 25 years ago we had a cheap apartment, a cheap car, slept on a sofa bed and watched a 10 inch black & white TV. But I got to sleep every night with a hot 25 year old blonde. Now we have a $500,000 home, a $45,000 car, a nice big bed and a plasma screen TV, but I’m sleeping with a 50-year-old woman. It seems to me that you are not holding up your side of things.”

My wife is a very reasonable woman. She told me to go out and find a hot 25-year-old blonde, and she would make sure that I would once again be living in a cheap apartment, driving a cheap car, sleeping on a sofa bed and watching a 10-inch black and white TV.

Aren’t older women great? They really know how to solve your mid-life crises!

Rob