Sep. 24, 2007: With the 10-yr at 4.66%: a reminder on just how those FNMA/FHLMC loan limits are set

Sep. 24, 2007: With the 10-yr at 4.66%: a reminder on just how those FNMA/FHLMC loan limits are set Rob Chrisman

The cop got out of his car and the kid who was stopped for speeding rolled down his window. “I’ve been waiting for you all day,” the cop said. The kid replied, “Yeah, well I got here as fast as I could.” When the cop finally stopped laughing, he sent the kid on his way without a ticket.

TransUnion has broken ranks with Experian and Equifax and said beginning in mid-October that it will allow individuals to “freeze” their credit histories, which will supposedly help consumers become more proactive about preventing ID theft. The three credit bureaus have lobbied for years to stop credit freezing laws from being passed in nearly every state.

On Friday HSBC Finance announced that it will close its wholesale mortgage lender Decision One Mortgage. (Decision One originates subprime mortgages through brokers.) HSBC will continue to originate mortgages through its consumer lending branch network under its HFC and Beneficial brands.

Conforming loan limits for the coming year are traditionally announced right after Thanksgiving. Fannie Mae and Freddie Mac are overseen by the Office of Federal Housing Enterprise Oversight (OFHEO). OFHEO uses the October-to-October percentage increase in the average house price in the Monthly Interest Rate Survey of the Federal Housing Finance Board (FHFB) to adjust the maximum limits for the subsequent year. (http://www.fhfb.gov/) Over time this has been a positive number. What if its negative, i.e., prices are declining? One of OFHEO’s goals is to “ensure an orderly and transparent process for any downward adjustment.” This is the ruling that came out last year:

1. If the average October (this year) price exceeds that of October (last year), the maximum conforming limits will be adjusted upward by the percentage increase in price.

2. If the October-to-October increase is negative, its effect on the maximum conforming limits will be deferred for one year. Last year’s decrease would be netted against any increase this year in determining the 2008 limits. If a decrease in average price this year is followed by another decrease next year (which it has), the maximum loan limits will decline in 2008 by at least this year’s percentage decrease in average prices.”

By the way, the maximum amounts for one-to-four-family mortgages and second mortgages in Alaska, Hawaii, Guam and the U.S. Virgin Islands (which some investors won’t even purchase) are 50% higher than the limits for the rest of the country.

What about California? In a recent letter to the House of Representatives, Governor Schwarzenegger asked that conforming loan limits on mortgages sponsored by FNMA, FHLMC, and the FHA be increased due to the costly home prices. “Nowhere is this problem more acute than in California, where astronomically high home prices have historically meant that home buyers could not access federal programs to help them obtain safe, secure financing,” Schwarzenegger added. “That is because many federal loan programs cap out at prices far below average home prices in California, meaning that home buyers often relied on financing outside of government-backed loans in order to achieve homeownership.” Unfortunately for Arnold, Federal Reserve Chairman Ben Bernanke warned about creating additional instability in the marketplace by increasing caps on loan limits and inducing more risk in new segments of the market.

For the last five business days of September, we have a pretty “newsy” week. There is nothing today, but tomorrow at 7AM PST we have the Consumer Confidence Index for September – are consumers willing to spend? It is expected to show a decline from last month’s reading (104.5, down from August’s 105.0). We will also see August’s Existing Home Sales report from the National Association of Realtors, and it is also expected to show a decline from July’s sales. Wednesday we have Durable Goods and a 2-yr Treasury Note auction, Thursday Jobless Claims, GDP for the 2nd quarter, New Home Sales, and a 5-yr Note Auction, and finally on Friday Personal Income and Consumption, Construction Spending, the Chicago Purchasing Manager’s Survey, and the University of Michigan Confidence Survey.