“Some lawmakers are calling on Congress to stimulate the moribund jumbo-loan market by letting Fannie Mae and Freddie Mac purchase substantially larger loans on homes in high-cost metro areas.”
“As of Friday, the average rate on a 30-year fixed-rate jumbo loan was 7.36 percent, versus 6.64 percent on a conforming loan, according to HSH Associates. That difference – almost three-quarters of a percentage point – is about three times as wide as normal.”
“In the first half of this year, 62 percent of home-purchase mortgages in the Bay Area were jumbos. In San Francisco, San Mateo and Marin counties, about 78 percent were jumbos, DataQuick reports.”
∙ Fannie, Freddie could help to stimulate jumbo mortgage loans [SFGate]
Over zealous politicians who appear to understand very little about economics should pause and think for minute about whether the market is right and jumbo loans in CA should have 75 basis premium on them. As the recent REO auction in San Diego shows, selling foreclosed homes in expensive coastal markets where jumbo are used requires a big haircut from the purchase price. Thus, it’s likely the lender will come no where never recovering the loan balance.
The jumbo spread may very well reflect the true risk of those loans in the current environment. Congress forcing Fannie and Freddie to buy them could expose the taxpayer to a huge amount of default risk.
Jumbo rates will come back a bit whether or not Fannie Mae and Freddie Mac are given the OK to up their limits, although such a move would speed up the process (note that if Congress does nothing — the likely outcome — those limits will actually decrease since they are pegged to the now-declining housing cost index).
The more relevant part of the story for SF purchasers is that the days of low or no money down are over — for many years. Unless you can come up with a couple hundred thousand in cash for a down payment, you cannot buy here anymore. There are two key reasons for this. First, no lender offering such mortgages would ever be able to sell them with the big investors having already been burned by such products, and thus they won’t be offered at all. Second, California’s anti-deficiency statute generally does not allow a lender to go after anything but the house if the borrower defaults (this does not apply to refis, only original purchase loans). In a market where prices are declining, or even at risk of declines, lenders are not going to accept all of that risk and are going to demand a big cushion from the borrower.
Two months ago, anyone with a pulse could borrow a million bucks. Now you need a pulse, $200K in cash, verified income, other assets, etc. Changes the demand-side of the price curve considerably.
Let’s not forget that jumbos are a coastal phenomenon – the majority of Americans living in flyover country don’t need/use jumbos because the median home price is like $225K. So this added liquidity would only help stretched Californians and Noreasters.
In other words, less incentive for Congress to do it given it won’t help the bulk of people. You could argue it only imposes more risk on an already fragile system at the GSEs.
But if the limit is bumped, my guess is that they would let Fannie and Freddie buy loans up to $615K or so…think that was the recent carve-out for high cost areas. That will lower borrowing costs for many Bay Areans…but to Trip’s point, cash will still be king.
What are the chances that Congress would do such a thing as to let Freddie and Fannie buy into these loans, especially since it was pointed out by Dude that it will really only help Californians and Noreasters:
– California: 55 electoral votes (20% of needed to elect)
– New York: 31 electoral votes (11.5% of needed to elect)
– Massachusetts 12 electoral votes (4.4% of needed to elect)
If I understand Dude correctly, his thought was it wouldn’t be worth it only for helping Californians and Noreasters. Maybe there are other reasons to do so…
Almost 80% of new purchases were financed with Jumbo loans? What happened to all those all cash buyers that have cashed out tons of equity or stock options and make the San Francisco market immune from any downturn?
Agree with the Monkey, there’s a growing rate spread for a reason. Decreasing property values and increasing risk.
People in California and New York are more likely to be impacted by the alternative minimum tax, but you have not seen Congress do anything about it. Instead, efforts of Congress a couple of years ago were directed at letting people in states with no state income tax deduct their sales tax.
let’s get rid of prop 13 and then we can really let the free market dictact price.
You guys do realize that this rate differential is meaningless, right? A $700K loan at 7.36% is a payment of $4,827 per month. If the rate drops 50 basis points, as they allude, the payment falls to $4,591, a paltry difference of $236/month. WOW! Most San Franciscans spend more than that on wine every month.
Dude, if the home owners are cutting back on wine or lattes every month, don’t you think that still affects the economy and their quality of life?
Dude — I agree. Anyone who is holding off buying a place they really love at the right price in the hope that jumbo rates will fall by 50 points is crazy. That’s why the far bigger story is the end of no money down. This affects high price markets like SF much more than other locales.
Sarcasm aside, I was implying that if someone can afford a monthly nut of over $4K in the first place, that extra $200 likely isn’t going to break them or influence their decision to buy or not. So if/when jumbo rates drop by 50 bps, it’s unlikely to have a material impact on the market as a whole.
I actually think that many people already stretch to buy their home, and do not want to pay the extra $236/month, especially now that they have to put more money down and have less in reserves. People will less likely want to stretch with the uncertainty of the real estate market right now. If they get in a bind and don’t have enough in reserves, it’s less likely they will be able to sell and not take a hit.
ps-Doesn’t matter how rich you are, wouldn’t you like an extra $236/month in your pocket if you could?
from my experience, the richer you are, the more you care about that extra $236. That’s why the rich keep getting richer
Um.. again, I’m stupid, but isn’t “Higher Rate for VAST MAJORITY of San Franciscans” kind of misleading?
Jumbos have dried up because the mortgage companies that offered them are going out of business. And now lawmakers want to expose Fannie and Freddy to this type of risk? You gotta be kidding me!
The housing market will recover once the suicide loans disappear and housing prices return to around 5-6X median salary. No need to panic.
You guys do realize that this rate differential is meaningless, right? A $700K loan at 7.36% is a payment of $4,827 per month. If the rate drops 50 basis points, as they allude, the payment falls to $4,591, a paltry difference of $236/month. WOW! Most San Franciscans spend more than that on wine every month
– umm, yeah dude, I do care, and I care alot. I realize you were being sarcastic, but the reality is that wealth creation is made on the margins. 50 basis points or $2500+/yr x 5-10yr holding period = 12.5k-25k or approx 10-20k in inflation adjusted dollars.
I have left index mutual funds for an expense ratio difference of less than 20bps, so an increase in the risk premium for jumbo loans of 50bps is huge, and will have a huge impact on loans and consequently on demand. I’m a homeowner (6.5 30 yr fixed 80/20), and I never would have bought at my purchase price at current rates.
I’m not a bull or a bear, just a realist, and rates that are 50bps higher due to a risk premium – that is a strong headwind in the face of real estate prices. The 20% down and docs stuff just isn’t as important as interest rates. If you offer me a decent sfh or condo right now, with a 20% down 30 yr fixed and a rate of 5.50-6.00, i’ll find 200k and take out an 800k jumbo. Easy money is a winning propostion, and those who have the funds would circle the wagons to join the fun. 7.25-7.50 rates- these are becoming more like real loans (not free money).
Although the rate differential is an issue, the bigger problem to me seems the increased down payment requirements and tighter lending standards in general. Forget the small increase in rates – people with bad credit won’t be able to buy period. And most people in general simply won’t qualify for larger loan amounts, i.e. 90% or 100% loans.
I know that for my own personal situation, I simply can’t qualify for the same loans that I qualified for before which means I can’t buy as expensive a house. The reduction in available buyers has to have some impact on the market at some point, either in reduced volume or lower prices…
It’s always hard to tell who’s being serious on the interwebs. I’m assuming a comment like “the richer you are, the more you care about that extra $236” is made purely as a little joke among the rich folks, and not meant to be taken seriously.
Enonymous, it is not that easy to just “find” 200k. Heck, let’s just “find” 600k and take out a conforming 400k loan at prevailing low rates. Problem solved.
I’m not rich and $236/month is material to me. But if someone can afford a hypothetically-conforming $700K loan, by definition they need to have gross monthly income of $17K/month, or about $210K/year (assuming 28% back-end ratio).
That’s why I made the comment that letting Fannie and Freddie buy jumbos would be largely ineffectual. Dubya and Hank are both opposed to this anyway…at least for now:
http://biz.yahoo.com/ap/070821/paulson_markets.html?.v=10
Trip made a great point above, and I agree wholeheartedly.
The 80/20 loans face considerable headwinds for quite some time. I won’t say they’re gone forever, because they’re not.
However, you’re going to have to pay big bucks to get that 20% second loan.
Companies are STILL dropping like flies out there. I think that First Magnus was the latest big victim (and they’re big).
http://www.firstmagnus.com/
http://www.forbes.com/feeds/ap/2007/08/21/ap4041497.html
and I’ve heard grumblings that ResCap (the largest privately held mortgage lender) is in big trouble (not bankrupt,but debt suddenly got super expensive for them… and they’ll have to pass that on to borrowers if they are to survive)
http://www.bloomberg.com/apps/news?pid=20601087&sid=a_iSMCtbGF0w&refer=home
And I also agree that DOWNPAYMENTS are a bigger issue than interest rate.
If you raise the interest rate 50-100 basis points, we’re talking a few hundred bucks a month. Sucks for new borrowers, but doable.
But I have a hard time believing many first time buyers have $200,000 laying around for a down payment. some do, but it’s few.
I think the govt may try to finagle with Fannie Freddie but there are 3 problems with this
1. Loan limits. Raising limits may work but there is NO WAY the’ll let them go from $417,000 to $650,000!!!
2. Portfolio size. Fannie/Freddie can only be so big. It is doubtful the govt will allow them to absorb ALL the mortgages.
3. Financial status. have we forgotten? Fannie and Freddie are still embroiled in TONS of fraud and accounting issues to this day. we’re going to add a bunch of garbage mortgages to their balance sheets?
Wow, this works out PERFECT! If there is one thing we know for sure about San Franciscans, it’s that they love to pay more for the exact same thing that other people get for less.
I think one benefit of rates going up is that it will help to keep folks out of trouble by forcing them to consider a more modest home. Satisfy me now is the mantra that has to go.
Enonymous, how do you just “find” $200k and can you show me how?
There are now LOTS of reasons why people who would have been able to get loans last week cant get them this week.
A lot of people couldn’t document their income to justify the loan, but got the loan anyways. Those people are all out of the market. Come back in 5-10 years when your income matches the loan.
Other people had no downpayment. Those people are now out of the market. Come back in 5 years when you can save up the coin. And don’t just save up the 200K, you need another 40K in assets after the down.
Other people don’t have sufficiently good credit. Those people aren’t going to get any jumbo loans either. Come back in 5 years after you have cleaned up your credit.
So the market is functioning like it did 5 years ago.
So who is going to save us from the long, cold winter of 5 years while the buyers catch up? Senator Dodd? Mr. All Talk and No Action? Anyone who allies himself with that loser is going to find himself shut out of the Hillary/Obama administration. So I don’t think that’s going to happen.
What about a united democrat solution. The democrats didn’t do jack when it came to their constituents, the subprime crowd. So now they’re going to help the rich Alt-A/Jumbo crowd? Not likely. They’re not going to do anything that would prevent them from pointing fingers at the republicans as being solely responsible. So they’ll talk, but wouldn’t dream of actually doing anything. Besides, everyone knows the problem was that money was too easy to get: making money easy to get won’t solve anything and then the problems will still be around, but the democrats will have to share the blame. So, they’ll stay out of it.
And what about Fannie or Freddie? Should they push to be able to hop in to this mess and buy up the loans and resell them. In case you missed it, they seem to be having a few problems of their own. They skipped their debt financing this week. No buyers. Not even for their regular debt offerings.
http://www.marketwatch.com/news/story/fannie-mae-skip-august-debt/story.aspx?guid=%7BAB7F6BE0-8766-4E14-B7C1-E8E88ED7FB96%7D
Whoa.
Toto, we’re not in Kansas any more…
I wonder how many of the Rincon deals are going to fall through in light of what’s happening right now.
That is exactly what I have been wondering.
And if, say, 30% of buyers would no longer be able to obtain financing, what would that mean for projects which hadn’t broken ground yet?
“I wonder how many of the Rincon deals are going to fall through in light of what’s happening right now”
My firm is involved as a design consultant on a 90 story high rise project in Chicago and we are already seeing some buyers walk away from their deposits.
Well, you might finally be able to rent an apartment without having to jockey with 30 other people just to see the inside. And the condo conversions would dry up. Doesn’t sound too bad to me. 😉
On the other hand, building in San Francisco is hard enough as it is… I sure hope it doesn’t scare developers away.
Funny to me to see discussion about down payments on this thread and concerned expressed about rising rents on another one. To listen to the biggest “market-crash-renting-is-smarter-than-buying” cheerleaders on this site, all of the genius renters are wisely saving and investing whatever different there is between their rent and what they would be paying out for a mortgage , HOA dues and taxes. So, why the complaints about coming up with a $200k down payment? Hasn’t the financial superiority of renting made it a piece of cake to come up with that?
SB – If home purchases decline where do you think those would-be “buyers” are going to live? Guess what happens to average rents in SF when home purchases decline?
What is the conforming limit in HI? Why couldn’t they raise that limit in other “high cost areas” in CA and NY?
seehsee – didn’t you recently state, on another thread, that you yourself would not buy today at current prices, basically admitting the financial superiority of renting?
SB – If home purchases decline where do you think those would-be “buyers” are going to live? Guess what happens to average rents in SF when home purchases decline?
They’ll live in their first homes.
It’s been pretty easy to buy a second home in SF for weekends and special occasions when you needed no down, and the price increased at about or more than the payments you made, making the price of any home free or less.
Not so any longer.
We’re about to find that, though the market was underbuilt when homes were essentially costless, the market is now overbuilt when homes cost money.
KK — not sure I understand your point. If home prices decline, that does not mean that fewer people are going to buy. It just means they will pay less. I don’t think you can reasonably correlate lower home prices to higher rents. I suspect that any correlation is just the opposite (where home prices are lower, so are rents).
Seehee, I think you were being tongue-in-cheek. But it is certainly not inconsistent to reason that one may come out ahead $1000/mo. by renting rather than buying but that one would still need a long, long time to save up a $200k down payment.
Re: “SB – If home purchases decline where do you think those would-be “buyers” are going to live? Guess what happens to average rents in SF when home purchases decline?”
If we have a full blown RE recession, and it isn’t a forgone conclusion, but is increasingly likely, all those “condos” will be dumped on the rental market. Supply will not be static, or shrink.
Cary
“It’s always hard to tell who’s being serious on the interwebs. I’m assuming a comment like “the richer you are, the more you care about that extra $236″ is made purely as a little joke among the rich folks, and not meant to be taken seriously.”
I was being 100% serious. you don’t become wealthy by balking at $236, but you do continue to be poor by balking at the same amount. Most fortunes are built $1 at a time
Okay Jimmy, I’ll take you seriously. I’d like to become wealthy. Let’s say that between rent and essentials the only money I can save every month is the pre-tax 10% that goes into my 401k. Since I make the median income for a SF family, I have a lot of company here. I have no debt, but everything else is spent on keeping three people alive in the city with a minimum of extravagance. Now let’s say my uncle Jimmy decides to mail me a check for $250 every month. How I should invest my $3,000/year windfall?
I should be socking that paltry sum away for my kid’s college fund, since various mechanisms would let me invest it in a tax-sheltered way. On the other hand, the kid’s grandparents live across the country, and seeing them each once a year would wipe out most of uncle Jimmy’s gift. It seems kind of tough to get wealthy on these terms. Any ideas?
Michael…
The dot.com bust happened awhile back. We have been trying to figure out who is buying all these homes since. We know people who bought with 100% cash and drove up the housing market back then, but not in recent years. Jeez, I know people sitting in homes that cost in the millions back then…do you realize that according to today’s stock prices, they got a deal of a lifetime? Jeez…if the stocks are worth a tenth of what they were, aren’t the homes worth that in stock valuation?
Dude: I said “if” I could only put down 20% on a $600k property.
But my point was that the “superiority” of renting vs. owning in today’s market only applies if the renter indeed has the discipline and savvy to save and invest any monthly cost benefit of renting vs. home ownership.
seehsee – whether or not any given individual has the discipline to save and invest the difference between renting and buying is irrelevant when calculating which option is better from a financial perspective.
$250 a month invested in an S&P index fund returning a historical average of 11% is worth 54000 in 10 years, 220000 in 20 years, or 632000 over the course of a 30 year mortgage. Past results are no guarantee of future performance, etc. Thanks Uncle Jimmy.
Okay Jimmy, I’ll take you seriously. I’d like to become wealthy. Let’s say that between rent and essentials the only money I can save every month is the pre-tax 10% that goes into my 401k. Since I make the median income for a SF family, I have a lot of company here. I have no debt, but everything else is spent on keeping three people alive in the city with a minimum of extravagance. Now let’s say my uncle Jimmy decides to mail me a check for $250 every month. How I should invest my $3,000/year windfall?
I should be socking that paltry sum away for my kid’s college fund, since various mechanisms would let me invest it in a tax-sheltered way. On the other hand, the kid’s grandparents live across the country, and seeing them each once a year would wipe out most of uncle Jimmy’s gift. It seems kind of tough to get wealthy on these terms. Any ideas?
1st off, the savings is 236/month, not 250, although i would love to be able to invest that extra 12/ month. small things become big over time.
If you ahve an opprtunity to sock this money in a 401K, that would work well. Otherwise, I would put that money in index funds every month and the compound interest will build quickly over time. by investing $236/ month, with compound interest (12%), you could have 257,000 in 20 yrs. that is not a bad ROI IMHO. much better than the housing market.
Laughing off $3k a year is something that keeps people in the poor house. yo have to tke advantage of what you can. I suggest reading the millionare next door. most wealthy people in america make at or just above median incomes. they just learn to save and invest. start small and be consistent. and tell the grandparents to fly out here.
“paltry sum”
the problem here is attitude. I make near 300/hour, but do not in any way consider this to be a paltry sum and paying 300 more per month in mortgage would make me think twice. I consider anythin less than $5 a month to be a paltry sum.
“I don’t think you can reasonably correlate lower home prices to higher rents. I suspect that any correlation is just the opposite (where home prices are lower, so are rents).”
I’m not trying to correlate the fact that there is an inverse correlation b/w home sales and rents, it’s documented on numerous websites/studies in addition to my experiences here over 15 years. A majority of home sales in the price ranges being hardest hit from the tighter credit markets (98% of purchase price is financed for homes sold under $1.5mm) are to first time home buyers. If they don’t vacate a rental unit for a home, condo, TIC etc. then the rental stock tightens assuming net migration is still occuring. Same goes for home sales/purchases by current owners. If you own a home and sell it to move up, you free up housing stock, theorertically stock that’s affordable to a larger segment of the market, first time buyers, i.e. renters. If home sales stagnate, fewer homes and condos free up for first time home-buyers, meaning a still tighter rental market in SF.
And it’s unlikely those condos will be dumped on the rental market. The developer, unless funding the majority of the project, owes the lender who fronted the capital for construction. Becasue of the disconnect between condo/home prices and cap rates, most developers can’t afford to switch to rental units because they must repay the loans.
KK wrote:
“And it’s unlikely those condos will be dumped on the rental market. The developer, unless funding the majority of the project, owes the lender who fronted the capital for construction. Because of the disconnect between condo/home prices and cap rates, most developers can’t afford to switch to rental units because they must repay the loans.”
You are assuming that the developer is going to hold on to the property. I would imagine that a number of apartment property management companies would be interested in picking up a new building in SF. As you may know, new construction in SF is exempt from rent control which should make new construction very attractive from an income standpoint. I know that Avalon Bay has been very successful with their new rental product in Mission Bay and they are moving forward with a second tower.
Check out what is happening in DC right now with new Condos. I can foresee this (developers canceling marginal projects and flipping others to rentals) happening here if the jumbo loan rate differential is maintained for a more than a couple of months and the housing market continues to slow down.