Category: Bay Area Local

From A Colleague:

The two major questions on the new conforming & FHA loans rage on: when and how? The President is expected to sign the bill this afternoon. However, James Lockhart, OFHEO Director (the regulator for Fannie Mae and Freddie Mac) indicated that any increase in the GSE limits would require “new product approval process” to evaluate credit risk, concerns about geographic concentration in high risk markets and prepayment risk associated with jumbo purchases. He went on to say that implementation could take between one and up to three months for enactment, and that operational issues including system changes could delay implementation. Since FNMA & FHLMC follow OFHEO’s lead, these comments must be taken seriously, especially since he was opposed to the mortgage limit increase.

questions? Email me.

Stay tuned…

From a colleague:

Please see the graph below, from UBS. The spread saw a dramatic widening in August, narrowed slightly in September, but then widened out (and stayed there) in November. It is widely hoped that spreads will narrow, but many analysts feel that the change in conforming limits will actually have a negative impact on loan amounts above $730,000, due to the perceived higher risk.

From Goldman Sachs:

Fiscal Stimulus- Becomes law this week; the first checks will be mailed in mid-May

On Wednesday, President Bush is likely to sign into law the recently passed economic stimulus bill.

Loan limits: The legislation raises the limit on the size of mortgage that Fannie Mae and Freddie Mac may purchase and that the Federal Housing Administration (FHA) may insure. In both cases, the increases are temporary and apply only to loans originated by the end of 2008. Under the bill, Fannie and Freddie may purchase loans up to 125% of the median home price in an area, up to a national limit of $730,000. FHA limits would see the same increase. In addition, the floor on FHA limits would be raised so that larger FHA-insured loans would become available in low-cost areas. Area-specific loan limits for the GSEs and FHA should be issued by mid-March. These provisions should benefit borrowers, but the effect may be modest. Jumbo rates have been higher than the present conforming rate (30 yr fixed) of roughly 5.5% since only mid-2005, and the rate on these new conforming-jumbo loans may not come down as far as the traditional conforming rate. Also, of those who originated loans in late 2005 through 2007, most have lost equity in their homes since. In virtually every city in which the increased limits are likely to apply, the Case-Shiller index now stands below its late 2005 levels.

ALSO TODAY WELLS FARGO Released a memo stating that they do not intend to accept applications based on the new loan limits until all details have been unveiled, and GSEs have responded with their impact studies, etc.

Talk about a wet blanket!

I’ll post more as I receive…

Chatter from today:

As I have noted for some time, many experts believe that FNMA & FHLMC being able to buy higher loan balances won’t cause a total reversal of the mortgage-banking slump. The higher loans could have fee adjustments, it may expire at the end of the year, and it won’t correct the guideline changes or cause their property value to increase, giving many much-needed equity. The Department of Housing and Urban Development will calculate the new loan ceilings and determine the geographic areas impacted, although most likely they will be based on MSA (Metropolitan Statistical Area). And investors still don’t know what to charge for the higher loan balances, which will be based on whether or not the loans can go into mortgage-backed securities. Regardless, yesterday’s vote was a shot of perceived good news for an industry that hasn’t had much to crow about in the last year.

And Then…

H.R.5140
Economic Stimulus Act of 2008 (Enrolled as Agreed to or Passed by Both House and Senate)

SEC. 202. TEMPORARY LOAN LIMIT INCREASE FOR FHA.

(a) Increase of High-Cost Area Limit- For mortgages for which the mortgagee has issued credit approval for the borrower on or before December 31, 2008, subparagraph (A) of section 203(b)(2) of the National Housing Act (12 U.S.C. 1709(b)(2)(A)) shall be considered (except for purposes of section 255(g) of such Act (12 U.S.C. 1715z-20(g))) to require that a mortgage shall involve a principal obligation in an amount that does not exceed the lesser of–

(1) in the case of a 1-family residence, 125 percent of the median 1-family house price in the area, as determined by the Secretary; and in the case of a 2-, 3-, or 4-family residence, the percentage of such median price that bears the same ratio to such median price as the dollar amount limitation determined for 2008 under section 305(a)(2) of the Federal Home Loan Mortgage Corporation Act (12 U.S.C. 1454(a)(2)) for a 2-, 3-, or 4-family residence, respectively, bears to the dollar amount limitation determined for 2008 under such section for a 1-family residence; or

(2) 175 percent of the dollar amount limitation determined for 2008 under such section 305(a)(2) for a residence of the applicable size (without regard to any authority to increase such limitation with respect to properties located in Alaska, Guam, Hawaii, or the Virgin Islands); except that the dollar amount limitation in effect under this subsection for any size residence for any area shall not be less than the greater of: (A) the dollar amount limitation in effect under such section 203(b)(2) for the area on October 21, 1998; or (B) 65 percent of the dollar amount limitation determined for 2008 under such section 305(a)(2) for a residence of the applicable size. Any reference in this subsection to dollar amount limitations in effect under section 305(a)(2) of the Federal Home Loan Mortgage Corporation Act means such limitations as in effect without regard to any increase in such limitation pursuant to section 201 of this title.

(b) Discretionary Authority- If the Secretary of Housing and Urban Development determines that market conditions warrant such an increase, the Secretary may, for the period that begins upon the date of the enactment of this Act and ends at the end of the date specified in subsection (a), increase the maximum dollar amount limitation determined pursuant to subsection (a) with respect to any particular size or sizes of residences, or with respect to residences located in any particular area or areas, to an amount that does not exceed the maximum dollar amount then otherwise in effect pursuant to subsection (a) for such size residence, or for such area (if applicable), by not more than $100,000.

(c) Publication of Area Median Prices and Loan Limits- The Secretary of Housing and Urban Development shall publish the median house prices and mortgage principal obligation limits, as revised pursuant to this section, for all areas as soon as practicable, but in no case more than 30 days after the date of the enactment of this Act. With respect to existing areas for which the Secretary has not established area median prices before such date of enactment, the Secretary may rely on existing commercial data in determining area median prices and calculating such revised principal obligation limits.

AND FINALLY… some color from a colleague:

How will the new amounts be priced? The law impacts loans originated after July 1 of last year. So do you remember all those jumbo loans for $500 or $600 or $700k that were purchased by Citi, Chase, Wells, etc.? Per the proposed law, these loans can now fall under FNMA & FHLMC guidance. Owners of these mortgages are “testing the waters” in terms of pricing in the secondary market. If there is little investor acceptance, rates will stay high. If there is investor appetite, rates on these high-balance loans will improve. It is anyone’s guess. Please note that the law “encourages” these loans to be securitized – it does not require it! So no one knows the answer yet. As soon as they hear, we will pass it along.

What is the schedule? President Bush needs to sign the legislation. That may happen this weekend, or sometime next week. I doubt any large investors will announce a policy until he actually signs the document. And even after that, pricing may be unknown due to questionable investor acceptance.

In the text of the proposed law, it mentions section 302(b)(2) of FNMA’s charter. If you are curious, here it is: http://www.ofheo.gov/Media/Archive/docs/reports/fnma.pdf

Here is the exact text of the law:

SEC. 201. TEMPORARY CONFORMING LOAN LIMIT INCREASE FOR FANNIE MAE AND FREDDIE MAC.
(a) Increase of High Cost Areas Limits for Housing GSEs- For mortgages originated during the period beginning on July 1, 2007, and ending at the end of December 31, 2008:

(1) FANNIE MAE- With respect to the Federal National Mortgage Association, notwithstanding section 302(b)(2) of the Federal National Mortgage Association Charter Act (12 U.S.C. 1717(b)(2)), the limitation on the maximum original principal obligation of a mortgage that may be purchased by the Association shall be the higher of–

(A) the limitation for 2008 determined under such section 302(b)(2) for a residence of the applicable size; or

(B) 125 percent of the area median price for a residence of the applicable size, but in no case to exceed 175 percent of the limitation for 2008 determined under such section 302(b)(2) for a residence of the applicable size.

(2) FREDDIE MAC- With respect to the Federal Home Loan Mortgage Corporation, notwithstanding section 305(a)(2) of the Federal Home Loan Mortgage Corporation Act (12 U.S.C. 1454(a)(2)), the limitation on the maximum original principal obligation of a mortgage that may be purchased by the Corporation shall be the higher of–

(A) the limitation determined for 2008 under such section 305(a)(2) for a residence of the applicable size; or

(B) 125 percent of the area median price for a residence of the applicable size, but in no case to exceed 175 percent of the limitation determined for 2008 under such section 305(a)(2) for a residence of the applicable size.

(b) Determination of Limits- The areas and area median prices used for purposes of the determinations under subsection (a) shall be the areas and area median prices used by the Secretary of Housing and Urban Development in determining the applicable limits under section 202 of this title.

(c) Rule of Construction- A mortgage originated during the period referred to in subsection (a) that is eligible for purchase by the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation pursuant to this section shall be eligible for such purchase for the duration of the term of the mortgage, notwithstanding that such purchase occurs after the expiration of such period.

(d) Effect on Housing Goals- Notwithstanding any other provision of law, mortgages purchased in accordance with the increased maximum original principal obligation limitations determined pursuant to this section shall not be considered in determining performance with respect to any of the housing goals established under section 1332, 1333, or 1334 of the Housing and Community Development Act of 1992 (12 U.S.C. 4562-4), and shall not be considered in determining compliance with such goals pursuant to section 1336 of such Act (12 U.S.C. 4566) and regulations, orders, or guidelines issued thereunder.

(e) Sense of Congress- It is the sense of the Congress that the securitization of mortgages by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation plays an important role in providing liquidity to the United States housing markets. Therefore, the Congress encourages the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation to securitize mortgages acquired under the increased conforming loan limits established in this section, to the extent that such securitizations can be effected in a timely and efficient manner that does not impose additional costs for mortgages originated, purchased, or securitized under the existing limits or interfere with the goal of adding liquidity to the market.

From a colleague:

The economic stimulus plan drafted by Senate Democrats was blocked by a Republican filibuster last night when the Senate fell a single vote short of the 60 needed to consider the measure. Now what? Since it is so close, experts believe that it nearly ensures passage of the House’s less expensive stimulus plan, though the Senate may make some changes. The Senate version was backed by automakers, home builders, realtors and mortgage bankers, and the AARP. Senate Republican leader Mitch McConnell of Kentucky said the Democratic stimulus bill passed by the Senate Finance Committee was “a Christmas tree of legislative goodies” that Bush might not sign. The alternative proposal passed by the House last week could be approved quickly and would be signed, he said, but Democrats face an uphill battle to get the 60 votes necessary to advance the more expansive Senate package in a procedural vote expected today. An interesting civics lesson, since I have forgotten most of what I learned in high school…

From Goldman Sachs:

The Senate failed to pass its fiscal stimulus bill last night, coming up one vote short. This was not a surprising development, and we suggested this outcome in our note on Monday (link below). Despite these negative headlines, the process is still on track – in fact last night’s developments may speed enactment – and still expect stimulus legislation to become law soon. Tax rebates, bonus depreciation for businesses, and a GSE/FHA loan limit increase are very likely to be enacted, perhaps as soon as late next week.

1. The Senate’s failure to pass a much different version of stimulus legislation may speed the process up. This is because reconciling differences between competing House and Senate versions would have taken days if not weeks. The House-passed bill was a slimmed down measure including only tax rebates, bonus depreciation for businesses, and increased loan limits (up to $730k) for Fannie, Freddie, and the Federal Housing Administration. By contrast, the Senate included all these things plus additional spending and even more tax breaks for businesses, some targeted at specific industries.

2. The House bill, or something close to it, looks likely to become law. The Senate is likely to pass the House-passed legislation, now that it has failed to pass its own. Before the Senate passes the House bill, one change looks likely: the Senate may add rebates for certain individuals with ‘unearned’ income. This would increase the amount of rebates in 2008 from $100 billion to $115 billion. Along with bonus depreciation, this brings the likely total cost to around $160 billion.

3. The Senate is likely to pass stimulus legislation by the end of the week. Senate Majority Leader Reid (D-NV) has said he may try to force one more vote on the Senate’s stimulus measure in the hope of finding one extra vote. This is possible, but these efforts usually don’t succeed, so we would expect the Senate to cast its final vote on stimulus legislation it will pass by the end of this week (possibly today). Majority Leader Reid will announce next steps at around 10:30am today.

4. Stimulus could still be enacted by the end of next week. If the Senate manages to send the House a bill by the end of the week, the House will pass the slightly revised version in the middle of next week and then send it to President Bush for signature. The only risk to this timing is if Democratic leaders attempt to make further changes to the bill, which could result in further delays in the Senate.

5. The legislative wrangling has little impact on timing of stimulus. We don’t expect a significant delay. But even if the bill is held up in negotiations, the IRS has made it clear that there is little it can do to process rebates before the tax filing season ends on April 15. This means rebates aren’t likely to make it to consumers until sometime in mid- to late May. A long delay could affect the timing of rebates, but a delay of a couple of weeks would be unlikely to make a difference in when rebates are mailed.

6. The differences between the House and Senate are of most interest to certain industries. Homebuilders and alternative energy manufacturers would have benefited from tax provisions that only the Senate bill included. These now look less likely to make it into the final version. Also, only the Senate bill would extend unemployment insurance (UI). While the final stimulus bill looks likely to omit this provision, an extension later this year looks likely, assuming unemployment rises as we expect. For more on the details of the House and Senate versions, see Politics & Policy 08/07