January 24, 2008

Conforming Loan Limits: A Placeholder For Discussion And Analysis

Analysis to come. But in essence, it's not a silver bullet (increasing the conforming loan limit that is).

UPDATE: And as was sure to happen, a plugged-in reader steals a bit of our thunder with reference to the OFHEO report, “Potential Implications of Increasing the Conforming Loan Limit in High-Cost Areas.”

First Published: January 24, 2008 12:25 PM

Comments from "Plugged In" Readers

on a related note, the preliminary agreement on the "stimulus" package coming out of Washington includes a provision to raise the cap on mortgages Fannie and Freddie can buy to as much as $700,000. Combined with lower mortgate rates this action will provide some help in S.F. to those who bought with ARMs in the last few years- which was most borrowers. I'm not sure it helps many other places except maybe Manhattan. Most other places where this would help- like SoCal- are probably experiencing price declines such that borrowers couldn't refinance any way even if their 600K mortgage would now qualify for much lower rates.

Posted by: anono at January 24, 2008 10:25 AM

hooray. privatize profits. then socialize the losses.

Giving high LTV loans at high multiples of income to people really worked out well for the private mortgage lenders.

That is why I really think it's a good idea to let GSE's do the same thing. [/sarcasm]

now all the troubled lenders can refinance this toxic garbage and put it into Fannie/Freddie's lap (oh, and FHA too)

It will then be a complete surprise in 2 years or so when all these loans fail too. And of course we'll have no choice but to bail out Freddie and Fannie.

Get your taxpayer checkbook ready... we're ALL going to pay for this!

I'm saving the $300 tax rebate (that i don't qualify for) so that I can pay my share of the bailout!

Posted by: ex SF-er at January 24, 2008 10:43 AM

doesn't raising the conforming loan limit just put Fannie and Freddie at greater risk? Fannie and Freddie are already having solvency problems. Am I the only one who thinks this is a bad idea?

Also, isn't the conforming loan limit based on some formula regarding prices. With prices falling shouldn't the max conforming loan amount be going down, not up? Oh, that's right in '05 when prices started to slow and reverse special legislation was enacted to prevent the limit from ever declining only rising.

Posted by: badlydrawnbear at January 24, 2008 10:43 AM

I'll believe it when I see it, and I'm not sure this would have a tremendous affect regardless. Fannie Mae and Freddie Mac are already reeling from the huge numbers of defaults on their books and they are tightening the standards -- and raising costs -- of the conforming loans they already buy. Just because a loan is within the max doesn't mean either will necessarily take it over.

Both stocks are getting hammered today even with the broader market slightly up. So their investors plainly don't see this maybe/possible increase as a panacea.

Posted by: Trip at January 24, 2008 11:00 AM

The apparent deal is to raise the limit to $625K. No surprise here, once you understand that the goal is to "trap" as many people in a depreciating asset as along as possible. This is of course a bad deal for Fannie and Freddie, as well as for the US taxpayer down the line. To put some numbers to this, rumors are that Fannie is to report a loss of $18B in its next financials (they haven't provided audited financials in YEARS). Its entire capital base is $40B. This miniscule capital (to be reduced in half soon) is supporting an asset base (either held outright or guaranteed) in excess of $1T. Meaning a 4% loss in assets wipes out its capital. Both the GSEs are already insolvent, as are most of the money center banks. All this is delaying the inevitable. Within the next few years, my best guess is that it all implodes in a deflationary spiral, or explodes in a hyperinflationary blowout.

Frost seems appropriate today:

"Some say the world will end in fire,
Some say in ice.
From what I've tasted of desire
I hold with those who favor fire.
But if it had to perish twice,
I think I know enough of hate
To know that for destruction ice
Is also great
And would suffice."

Posted by: Satchel at January 24, 2008 12:00 PM


Let's face it, $625k in SF (using Satchel's number) is basically "lower end", particularly in comparison to the types of properties that interest people on this board (I don't mean the $2-10 million properties, more like the $800k-1.6 million range). And even realtors agree that the lower end in SF is already being hammered. So this won't help SF much more than it helps SoCal. Maybe owners of nice 1 BR condos can refinance...everyone else has probably already lost too much equity.

Posted by: mike at January 24, 2008 12:32 PM

I'm no expert, but I don't see a huge downside for FM/FM. Jumbo loans have not (thus far) been the main problem in terms of defaults, and on average they are more likely to have been taken out by people who knew what they were getting into (I'm sure there were speculators as well, but just look at the default maps to see where the problems are. I'm not someone who believes in a teflon market anywhere, but unless the malaise seriously, seriously spreads or if lenders embark on the stupidity of subprime jumbo loans

This seems to me a way of allowing people with jumbo loans to refinance, taking advantage of the low interest rates that have come about with the tanking of the market. I'm on a jumbo 30 year fixed with 20% down -- and in terms of economic stimulus, the ability to refinance is definitely going to help me, not to mention that expanding the pool of buyers is going to boost the market up to the threshold.

Posted by: anonyman at January 24, 2008 12:52 PM

Goodness me, with the way I badly wrote my above post you would think I cannot finish a sentence, and that's just

Posted by: anonyman at January 24, 2008 12:54 PM

For now, the Treasury is still against this.


Anyone else seen the classic French movie "Wages of Fear," where folks are hired to drive an old truck full of nitroglycerin across a bumpy desert? This would be analogous to stacking extra pallets on a truck that's already barely moving.

That said, roughly 50% of jumbos are originated here in California. We may have some of the most absurdly bloated real estate prices in the country, but we are the most populous state. And it's an election year.

Posted by: Dude at January 24, 2008 12:55 PM

Can someone explain this?

"The proposal would lower home-buyers' down-payment requirements when getting FHA loans, increase the cap on loans eligible to be FHA-insured and lower origination fees It is believed those changes could help lenders make loans to risky borrowers who have found it difficult to arrange for home financing since the collapse in the market for subprime mortgages last summer."

Posted by: tom at January 24, 2008 12:57 PM

Oops! Now, the reports are that the conforming limit will be up to 125% of median price by "area" - not sure what is meant by area - with an absolute upper bound of $725K or $730K (differing reports). I guess we'll have to wait for the details.

That should trap a few more people in SF! In the end, this is silliness, and as much as some would like to believe, I'm not saying this as a bitter renter (this should be great for renters, as it will further incent owners to hold depreciating assets, causing them to rent them out at low rental rates).

To the extent the government is trying to keep housing pices from correcting back to equilibrium (not to help homeowners, but to help their lenders), this will just incent builders, flippers, etc. to continue to oversupply housing, leading to further asset price pressures in the future. The best thing about it, is that current owners (70% of the population more or less) will support it, thinking that we are off to the races on appreciation again. As Lenin once said, when we hang the last capitalist, it will be with the rope he himself manufactured, or words to that effect.

Posted by: Satchel at January 24, 2008 1:00 PM

I have what is possibly a dumb question. Let's say that I own a SF Home and

* It's worth $1mm
* I got a 10/1 int only, with a very good rate, at $650K, meaning I put down $350K. In year 3.
* I would like to move into a 30 year fixed, but the spread btw jumbo and non jumbo is still 125+ basis points.

Could i borrow up the the $417k jumbo limit and pay down the 10/1, leaving me with the following?

* $417k 30 year fixed, $233K 10/1

Given the fact i put a large down payment down and assuming valuations are flat (hopefully), would the bank allow this? Or would any interest premium they would charge me, make it too expensive?

Sort of a weird question, but wanted to ask.

Posted by: warrenpease at January 24, 2008 1:00 PM

Tom, the explanation is that the current problem is not the cost of lending (interest rates) it is of lender's willingness to lend. If lenders can lend to riskier borrowers and then shove the problem off to Fannie and Freddie they will be more likely to lend again.

Then, once Fannie and Freddie go insolvent the taxpayers who got $300 dollars from the fed will have to fork over thousands each to bail them out.

Privitize profits and socialize the losses, it's American capitolism at its finest.

Posted by: badlydrawnbear at January 24, 2008 1:03 PM


Could you explain how enabling more of SF to take out conforming loans leads to an oversupply of housing? Wouldn't it also enable a bigger pool of buyers to enter the market because of lower rates, thereby MEETING the existing demand for housing at certain prices?

And surely you should know by now that with 70% of the population owning homes, and a much bigger proportion of the voting population, the homeowners always win.

Posted by: anonyman at January 24, 2008 1:05 PM

The apparent deal is to raise the limit to $625K. No surprise here, once you understand that the goal is to "trap" as many people in a depreciating asset as along as possible.

Oh please... I wouldn't impart some sinister motive to this, nor would I say that helping people buy or stay in a home in a pricey area is an attempt to "trap" them. Whether it's good policy or just a fuel for another bubble is a valid argument. But I'm sure many people will benefit from this and they'll be happy to have a "depreciating asset" to live in.

Posted by: anon at January 24, 2008 1:06 PM

I am also in SF on a 30-year FRM and this is going to help me tremendously. The spread between jumbo and conforming has been higher than ever over the last six months (right now ~1.3%) so based on my math, my payment could go down by more than $600/mo.

There's conflicting news out there about the deal (one report says $625k across the board, one says 125% of metro-area median with a cap of $725k). If it ends up at $725k, that's a $900k property with 20% down. Maybe not mansions but not exactly "low end".

Posted by: "Dave" at January 24, 2008 1:09 PM

There is no deal to raise it to 625. The deal is to raise it to 125% of the local market median..which in SFO would put it up in the 700 range. I think it will help the local RE market somewhat but I am not to thrilled that some markets may in fact still decline substantially, thus any losses would be guaranteed by the government. but yeah it will help.

Posted by: cooper at January 24, 2008 1:23 PM

Assuming this deal becomes law (and I'm skeptical given the pretty heavy guns that are against it), it will be good for refis, especially for recent buyers at relatively higher rates. For would-be buyers, it will mean that you get a couple hundred thousand of your loan at about a point lower. But that assumes that you meet the now much tighter lending standards and have a big downpayment, as these requirements won't change. Will that persuade some who meet these requirements to buy who otherwise would not? Hard to imagine -- maybe a very few. Basically, a bit better deal for those who could/would buy anyway, but I don't think it's going to affect the numbers of ultimate buyers by much.

Posted by: Trip at January 24, 2008 1:31 PM

as a holder of a 6.5% 30yr jumbo with 662k outstanding (20% down, currently about 78/22 LTV), this is the rare 'stimulus' move that will actually be helpful to me. It is quite incorrect to say that raising the conforming limits is a meaningless move.

Given the spreads between conforming and jumbo loans, of about 75 to 100 basis points of late, I'm looking at a potential decrease in monthly payments of around %400-$500.

That is far from a trivial sum of money, even to someone like me, who earns a decent amount more than the 'average socketsite reader';

Of course, during the chaos of the wild rate swings yesterday (the 30yr rates moved as much in 1 day as they sometimes move in multiple years), i did get a lock on 5.75 jumbo anyway, but the surge of applications to this credit union left me with a bit of a wait before i hear from their loan officers, which means they may or may not end up going forward with providing me with a loan...

with either 625k or 700+k as a conforming limit, i would easily be in line for a lower 30yr fixed rate (and i don't do ARMs or other weird exotic loans). funny how you hear very little about this portion of the stimulus plan... i would submit that $300 for a 30k a year earner is significantly less helpful than $4000 a year for a 300k earner. of course, it is harder to explain the change in conforming limits, so it gets shoved to the backburner...

Posted by: enonymous at January 24, 2008 1:31 PM

Assuming this deal becomes law (and I'm skeptical given the pretty heavy guns that are against it),

I'm curious, who is against this? I thought everyone liked a government bailout/guarantee...

Posted by: anon at January 24, 2008 1:37 PM


It's pretty simple. Raising the limits allows access to financing below that which the market would otherwise dictate. This leads to higher than equilibrium pricing. The higher pricing 1) incents long-term owners to keep their houses rather than sell them (even when they are not using them) because they judge that future appreciation is secure, leading to lower equilibrium rents); 2) incents builders to keep building (condos in SF, SFHs in the outer ring suburbs, insofar as all this applies to the SF area; and 3) the necessity for below market financing by definition means that (in aggregate) the productive capacity of the local population (the stock of human capital) is not sufficient to warrant the wages that would make them (again, in aggregate) good credit risks - this last point becomes the impetus for business to flee (all over time - let's not get worked up thinking it's going to happen tomorrow!). Pretty simple, really.

And, as for whether this a "plot" to trap people in depreciating assets, well, you either believe that the bailouts are being driven by the population is driving the process or that the banks are. I think the banks are! Let's check back in 5 years about appreciation/depreciation (because nothing happens fast in real estate!).

Last, about the idea that lower interest rates are a panacea for the maintenance of higher than equilibrium asset values, one need only look at Japan (where a reduction in rates to - basically - 0% could not stop a housing fall in excess of 60-80%), or the US stock market, which has now had negative nominal returns since around 1998 (maybe 1999, counting the meagre dividends) or so, and negative real returns going back to '96 or '97, all against a backdrop of generally decreasing rates and increasing credit expansion/availability. That's pretty extraordinary, given that long-term trend real returns to equities are around 6-8% (variously estimated), and greater than 10% nominally.

And, about your idea that the "homeowners always win", well, in a word, no. It's the banks that win. Always has been, and always will be in a fiat money system. The latest round of Wall Street bonuses ($38B in CASH, not that funny tech option share stuff), while losing something like $70B in shareholder value, should give anyone thinking seriously about these issues pause.

Posted by: Satchel at January 24, 2008 1:44 PM


Irony of ironies, my understanding is that regulatory-phobe Republicans want MORE regulatory oversight over FM/FM and have been calling for "reform," which in my opinion is code for "we don't like this program because it's an example of big government working."

Posted by: anonyman at January 24, 2008 1:46 PM

Satchel, there's more than one way for house prices to "get back to equilibrium". They can fall dramatically, continue to rise but at a slower rate than income, or anything in between. The Fed is trying to engineer something in between, and they very well may achieve it.

The downside, of course, is that this engineering process doesn't come for free. We will all pay for it in the form of dollar depreciation and inflation. Inflation (sadly) screws both the poor and those who save money over the long run, while it rewards debtors.

In any case, you're prediction of people "being trapped in depreciating assets" is by no means guaranteed. And by no means will inflation help renters. The best medicine for high rent is recession and mass layoffs. Direct correlation.

Posted by: "Dave" at January 24, 2008 1:46 PM

If you're interested in the subject, you should go read this:


This was OFHEO's recent analysis of the issue. Cooper's mistaken about the proposal: the increase would be either 125% of median, or $625,000, whichever is higher. That establishes a $625K cap on the new subsidy for the SF-Fremont-Oakland residential region.

The economics of this proposal are only something a numerically-challenged vote-grubbing incumbent politician (or BabyBooming homeowner) could love. Consider that the proposal is theoretically designed to increase "affordability" for those regions that aren't "affordable"... by offering an enhanced governmental subsidy that assures that those markets remain... unaffordable.

Who is going to absorb this new mountain of mortgage debt? Why, Fannie Mae and Freddie Mac, of course!

Fannie Mae only managed to file its 2004 Form 10-K with the SEC in... December 2006.

This is because its executives had run accounting fictions with its derivatives book to hit numbers that secured them over $100 million in bonuses:

This proposal will pass in the Senate with exceptional ease, as it will be shepherded through by Senator Schumer, who's been backing expansion of the GSE mandate for months & months.

What's this mean in practice?

Well, if you're a homeowner, you're happier today, because the USG is moving toward expanding the credit subsidy for you. This means that the marginal homebuyer who might not have been able to afford your asking price, because the cost to finance with a jumbo loan above $417,000 made that asking price prohibitive, will [now] be able to afford your asking price.

Assuming a requirement to put 20% down, the previous $417,000 sum implied a conforming loan maximum transaction price of ~$521,000.

Now, assuming that same 20% requirement and the new $625,000, the new conforming loan transaction price increases to... $781,000. That helps to refloat the bid under homes between $521,000 & $781,000 (since those homesellers would have otherwise had to rely on purchasers with a larger downpayment to make conforming, or who were willing and prepared to absorb the higher cost of financing with a jumbo loan... assuming they could qualify and find a lender).

Further, it will help marginally in the market above and proximate to the $781,000 price point, because it increases the mobility of that in-between seller to move up market.

Finally, it means that if you are a responsible saver and prospective first-time homebuyer who'd been thinking you'd be able to take advantage of the conforming/jumbo financing spread in the coming year (umm, like me), well, Nancy Pelosi hates you, and so does most of the rest of the legislative & executive branches, who act as if personal financial responsibility merits placement in Guantanamo....



Posted by: Debtpocalypse at January 24, 2008 1:47 PM

Warrenpease. Yes, in fact we've done it to a certain extent. Keep in mind that rates may rise as the balance creeps up from $350K but the $67K difference between the two shouldn't affect the rates too much. Something else you should think about though: Do you really want to lose access to that $67K HELOC for a difference in payment of $34 per month. (The difference between IO HELOC and $67K amortized over 30 years)

I assumed a 6.5% HELOC rate vs. 5.8% 30 year fixed on a balance of $67K. Personally, I like having access to the HELOC and I can determine how I want to pay it down.

Posted by: loudnclear at January 24, 2008 1:48 PM

Warrenpease. Yes, in fact we've done it to a certain extent. Keep in mind that rates may rise as the balance creeps up from $350K but the $67K difference between the two shouldn't affect the rates too much. Something else you should think about though: Do you really want to lose access to that $67K HELOC for a difference in payment of $34 per month. (The difference between IO HELOC and $67K amortized over 30 years)

I assumed a 6.5% HELOC rate vs. 5.8% 30 year fixed on a balance of $67K. Personally, I like having access to the HELOC and I can determine how I want to pay it down.

Posted by: loudnclear at January 24, 2008 1:55 PM

Hillarious. Everyone planned on there being a "Super SIV" to offload this crap debt. It was comical how people just ASSUMED that there would be idiot investors who would want to own this junk. That plan collapsed in flames because it was a bad deal for the investors.

The increase in loan limits is just the super SIV II, with FM/FM investors assumed to be the pigeons who will be stuck holding the bag, as if they are just going to take this any more than they jumped in as Super SIV investors.

Here's pretty much how it's going to work out:

Step 1: Raise the conforming loan limit.

Step 2: Investors stop buying the loans, realizing that the government is now offloading an enormous problem from the banks who originated the problems to them, and realizing that the problems with conforming loans have gotten so huge that the government can't possibly guarantee the loans if the loans go south.

Step 3: Conforming loan rates go up to the jumbo loan rates.

And now, like just about any other government intervention in a market, the problem is made worse, or at least doesn't get any better.

This is the funniest thing I've seen in years. I hope it passes.

Posted by: tipster at January 24, 2008 1:55 PM

mike- I disagree somewhat. There are lots of condos that were purchased from 2003 onward in S.F. for under 800K with non conforming ARMs that will reset between 2008-2011. Conforming 30 year loan rates are less than 5.5% now. I have a 2br with an non-conforming ARM (80%LTV) at 6% that will reset in 2011 (tied to 1yr. treasury series). If I can refi into a 30 yr. fixed at current rates- which may be heading even lower in the short term- I certainly will.

I agree this is no panacea, but for people who can afford their mortgages the ability to switch into a lower rate fixed mortgage now instead of facing a higher rate reset later puts money in their pockets down the road.

Fannie and Freddie have been seeking to increase the loan limit for several months because they realize that they can get some good loans on their books from the coasts.

Recent commentary has indicated that a number of borrowers in California are walking away from loans that they could afford because they percieve that it's better to walk away and ruin their credit then to try to gut it out. If they have a lower cost alternative, they may stick it out. At least this is what everyone is hoping for, to slowly deflate the housing market and moderate the impact of the impending recession.

Posted by: anono at January 24, 2008 1:55 PM


If you think prices are too high right now, why in the heck are you worried about more building in SF? It's simple supply and demand. You want prices to come down, and yet you're worried that lower rates will lead to more building? I don't get it. And access to lower rates is going to loosen the market, thereby allowing people who want to sell to be able to sell, or, conversely, to refinance and have extra money in their pocket -- lower rates never stuck anyone anywhere. Your point 3 is just mumbo jumbo.

And we're not talking about "below market financing," unless you're speaking toward a hypothetical world where Freddie Mac and Fannie Mae didn't exist. We're talking about expanding the pool of access to conforming loan rates to a group of (largely) responsible home buyers who have the "misfortune" of buying in places where prices are high. Maybe that will encourage a little more excess on the part of the lenders, but from my vantage point, overall it's not such a terrible thing to give some more people access to lower rates.

Posted by: anonyman at January 24, 2008 1:58 PM


Let's stay friends! Just for the record, I'm not "worried" about anything, least of all overbuilding. For me, housing is just an asset class - something to have fun with, thinking about, analyzing it, trying to come up with some structured way of thinking about it. Really - honestly - it's just an anonymous blog, so any of us can say anything I guess, but if prices doubled from here I could still pretty much buy anything I wanted here (maybe not anything, but my wants are relatively modest). If that were to happen, I would just laugh about it, and say, "well, I guess I screwed up that trade!" It's happened to me a thousand times in 15 years of trading the macro sensitive instruments. But, if I am right, and housing depreciates NOMINALLY up to 20 or 30% and stays down there over a 10 year horizon, can the average homeowner here laugh about it?

Like I said, it's all just fun. Let's check back in 5 years, and continue to kick around ideas in the meantime!

Posted by: Satchel at January 24, 2008 2:07 PM


Definitely -- no offense meant on my post. You're much smarter than I am, I can tell you that much.

Posted by: anonyman at January 24, 2008 2:09 PM

tipster, that's not accurate. Super SIV was for garbage CDOs built on the back of garbage MBS. Loans bought by FM have to be "conforming" and there are many hurdles (e.g. LTV ratios, documented income, price caps, credit scores, etc.) So, it's not even close to analogous.

You can argue all you want about whether or not FM should (a) exist and (b) guarantee loans, and you might be right, but it's ridiculous that Hawaii and Alaska have had a 50% higher conforming limit than California. This does level the playing field.

Posted by: "Dave" at January 24, 2008 2:28 PM

The cost of lending is not the problem it is confidence in lending. The raising of the conforming loan limit will help exiting home owners refi, which is ulitmately a good thing.

However, it won't allow people looking to buy to get in. With the loss of I/Os, option arms, and all the other crap that was out there prices are not sustainable.

Lower rates will not save the market, only lower prices, higher wages, and inflation will.

Posted by: badlydrawnbear at January 24, 2008 2:51 PM

Satchel, it's good to see that even *you* don't take your ridiculous prognostications seriously. ;)

Posted by: jojo at January 24, 2008 3:01 PM

Loans bought by FM have to be "conforming" and there are many hurdles (e.g. LTV ratios, documented income, price caps, credit scores, etc.) So, it's not even close to analogous.

At least for now. call me suspicious.
Step one: increase the loan limits
Step two: ask for "deregulation" to allow Fannie and Freddie to loosen all these "unfair hurdles to the American Dream"

it's already happening with FHA loans, where they want to drop the downpayment to 0% blah blah blah.
Not to mention the "HOPE NOW" program where we artificially cap the rate adjustments.

Once the hurdles drop, then all these toxic loans can be refinanced and packaged into Fannie and Freddie and FHA, and then bundled off to mom and pop's pension fund.

Then 2-3 years from now it will implode, but they'll say "nobody could have foreseen this!"

Nobody wants to bail out Countrywide. it's a private organization.

but the GSE's have an implicit federal gaurantee.

as others have posted, Fannie and Freddie can't even produce their financials within 2 years of when they're supposed to! And we want to increase their loan limits???

this is perfect though, because we can load them up with hidden toxic garbage... nobody will know since they don't produce financials. Then when they explode the CEO of Citi and BAC and WFS etc can all collect billions in bonuses, since they offloaded it to the GSEs. and we as taxpayers will do Savings and Loan part deux.

Posted by: ex SF-er at January 24, 2008 3:14 PM

Is it just me or does the OFHEO report report seem to spell out in bold exactly which regions of the USA would benefit from a rise in the conforming limit ?

Could that signal that voting in favor of raising the limits would benefit the parts of the USA with higher housing costs (California) more than the rest.

Could the vote on this matter become a highly political event ? A "no" gives the blue states a black eye.

Of course a "yes" eventually hurts all taxpayers but in an election year voters aren't looking more than a few months forward.

Posted by: The Milkshake of Despair at January 24, 2008 3:17 PM

The report does not include the implications of the new agreement. It was prepared the first week in January and was using #s (I think) from the reform legislation. The Agreement betweeen the White House and Congress is TEMPORARY for this year only. Last report I saw showed it was 125% of the local market median.

Posted by: cooper at January 24, 2008 3:23 PM

Honest question here: why are people assuming that raising the limit on conforming loans is bad for taxpayers or that this constitutes some sort of bailout?

It seems to me that, barring some obvious hiccups in the past couple of years such as the accounting scandal, Freddie Mac and Fannie Mae have been a hugely successful program that, over the years, has reduced the amount of money spent (i.e. wasted) on interest and have helped stabilize the mortgage markets. "Dave" is right -- the types of loans backed by FM/FM are the most sound loan structures out there, and until people lost their minds in the last few years, FM/FM dampened the amount of exotic loan madness out there. Not to mention the fact that other than some looming write-downs, FM/FM has so far weathered the downturn way better than most investment banks.

I don't see how widening the net a little bit is so onerous.

Posted by: anonyman at January 24, 2008 3:27 PM

Both Treasury and the OFHEO (who regulates Fannie Mae and Freddie Mac) are against this. The stock prices of lenders who originate all the garbage loans (IndyMac, Countrywide) are up on the news while the shares of Fannie Mae and Freddie Mac, who are expected to buy their loans, are down.

Assuming this passes into law (again, a big if), I'm not so sure the boards and shareholders of the latter two are going to permit mass buying of more, bigger garbage. My bet is this does not have the effect on non-conforming loan rates that people are being led to believe. I hope it does so all of us can refi at better rates, but I wouldn't count on it.

Posted by: Trip at January 24, 2008 3:32 PM

To the above reader...we are not assuming its bad for tax payers--its is. Have you not seen the write downs at Fannie Mae...prices for RE goes down-they write down their mortgage values. they have required capital ratios, if those ratios fall then they have to raise money. if they can't then they go bankrupt and the US govt must bail them out. read:US.

Posted by: cooper at January 24, 2008 3:34 PM

what's confusing about this ?
417 buys you a mansion in Atlanta and a a hovel in SF. Guess what ... that's the way it should be, because you can make a lot more money in SF. So why were buyers in SF getting penalized by an arcane, unintelligent conforming rate?

Glad to see it changed!!!!!

Posted by: gumo at January 24, 2008 3:36 PM

Doesn't a refi take away your ability to walk away scott free in Cali?

Posted by: Craig at January 24, 2008 3:38 PM


we are worried PRECISELY because the GSE format worked up until recently (neglecting gov't intrusion into the mortgage market)

What did NOT work were all the crazy loans that the non-GSE lenders decided to fund.

the GSE's kept some form of credit standards, where the true private sector did not.

it is the loans originated in the private sector (the NINA loans, high CLTV loans, etc) that are failing. It is those loans that need "help". it is NOT the "conforming" loans that need help.

we have some of the worst delinquencies EVER. And no, it is not just subprime, it is also in Alt A and Jumbo space as well

the #1 predictor of loan failure was NOT a low FICO score, but a high combined loan to value loan, REGARDLESS of FICO score.

Thus, if the govt is going to succeed, it needs to do something about the NONPERFORMING (garbage) loans, which are unsurprisingly the crap originated by the private compaines. The govt doesn't have to do much about the conforming loans, because those arent defaulting much.

The govt must therefore figure out a way to get people OUT of the private garbage loans, and INTO a "safe" loan like Fannie, Freddie and FHA.

But how do you make Garbage loans into non-garbage loans? The answer: for the most part, you can't.

So instead, you use an agency like the GSEs to hide the garbage. Investors will buy from the GSE's becaue they have an implicit government guarantee.

eventually, after the garbage is moved to GSE's books they will eventually underperform and then fail. And once that happens the GSE's will be bailed out by the taxpayers.

the point: The ONLY way to refinance these GARBAGE loans is to relax the rules. So we start by relaxing the loan limits (raise to 700k or so). Then decrease mandated down payments (legislation pending to drop down payment from 3% to 0% for FHA loans)

what would the use be of raising the GSE limits but keeping the 20% down rules and not allowing NINA loans? Most people who need help wouldn't qualify if that were the case.

Posted by: ex SF-er at January 24, 2008 3:39 PM


Still don't understand. The government doesn't subsidize FM/FM the way it does, say, the airline industry, farmers, the car industry (by building roads), etc. etc. They're government sponsored entities that function like corporations, mostly apart from the government. Unless you think they're going to go under completely (which doesn't seem likely from what I've read) and that taxpayers are then going to finance some sort of recovery, I still don't see how this is affecting Joe Taxpayer. Nor do I see how expanding the pool to jumbo loans, which so far have been more immune to default than conforming loans, is going to make FM/FM more like to go under.

Posted by: anonyman at January 24, 2008 3:44 PM

ex SF-er-

Ok, but what is being discussed here, to my knowledge isn't a relaxation of the definition of "conforming," and the standards are remaining. I've seen no proposals otherwise (maybe there were and I missed it).

And I don't think this is some slippery slope situation -- it's just a recognition that a "conforming" loan amount that was meant to exclude the highest end of the housing market is now snaring people who would be considered upper middle class in high price markets.

Posted by: anonyman at January 24, 2008 3:49 PM


What do you think government insured means exactly. When Fanny or Freddie issue debt its insured by the government which means if they start to have too many write offs and can't raise money the US government has to pay the debt. If you think loans can't go bad just take a look at all the non bank finanial institutions that underwrite loans. There used to be thousands now there are like 2 with the rest banruptcy. Jumbo loans have not been immune at all to defaults --that's just plainly false. The fed didn't just cut 75 bp because everything in the mortgage market is going super well.

Posted by: cooper at January 24, 2008 3:52 PM

"According to the proposal, the temporary limit for loans that can be bought by Fannie Mae and Freddie Mac, government-sponsored mortgage agencies, would be $729,750, or 125% of the median house price in the area."


Posted by: toni at January 24, 2008 3:52 PM

Tony--yep that 125% is correct. It's how the bill is currently written but it may change in conference when the senate gets it.

Posted by: cooper at January 24, 2008 3:54 PM

ex SF-er has got this right.

The major thing that current homeowners and homebuyers should really decide for themselves IMO is if ultimately as much of the garbage is to be passed to the taxpayer as possible, will the government turn to rampant money creation in order to inflate its way out of the mess? So far, there is no evidence that it is trying to inflate (the near money aggregates like M1 and monetary base would show this). If the government and the Fed do engage in this, wouldn't interest rates rise to the moon? The last time the government engaged in rampant money creation (late 1960s through late 1970s), asset prices in general did not do very well (there were exceptions of course).

Counting on inflation to bail out today's already sky-high asset values in SF (8-10 times median income, higher than at any point in SF's history or in the history of any US city I'm fairly certain - excepting the 2003-2007 period, of course) seems like a bad bet. And, in light of the significant differential between renting and owning (I know that a LOT more goes into the decision whether to rent or buy than simply rental equivalent yield), IMO a wise buyer would consider that the rents - which are a real time snapshot of the intersection of housing demand and available income/wealth for a region - are signalling that the demand to LIVE in SF is significantly less than the demand to OWN in SF.

If anyone has the information handy, I would love to know what the ratio between median SF price and median wage was immediately prior to the last example of money creation, say, in 1968-70. Does anyone know this?

Posted by: Satchel at January 24, 2008 3:56 PM


No doubt loans can go bad, I just haven't seen evidence that FM/FM is in danger of going under or in need of a government bailout, nor have I seen evidence to suggest that expanding the level of loans a bit higher is going to expose FM/FM to a great deal more of risk -- if anything, the types of conforming jumbo loans that we're talking about are some of the safest out there (if there is such a thing these days).

And even if taxpayers DID have to temporarily bailout FM/FM, heck, that's not that bad of deal for 70 years of subsidy free mortgage stabilization.

Posted by: anonyman at January 24, 2008 4:01 PM

anonyman - have you read this article?


Fannie was already hiding losses as of 9/30/07. And defaults have increased substantially since then.

Posted by: Dude at January 24, 2008 4:09 PM

Too many tinfoil hats around here... Changing the limit happens all the time. They just increased it last in 2006. This proposal is just more equitable than the previous model, which basically said that only Hawaii, Alaska, and the Virgin Island have high home prices. It's going to help some but not others.

I do have a secret to pass on to everyone though. If you're feathers get ruffled by the notion that loans passed from Citibank to Fannie Mae = a taxpayer bailout, you are off the mark. First of all, this isn't a bailout and isn't a lowering of standards. Secondly, you are out of your mind if you think that the federal government would bail out Fannie but let Citibank fail.

If any one of these big banks so much as teeters, you can bet your next rent payment that Bernanke swoops in and saves the day with government $. "Too big to fail" is just as ironclad as any agreement that Fannie or Freddie have...

Posted by: "Dave" at January 24, 2008 4:15 PM

Nobody said raising the limit equals a bailout. The point people made was it increases the risks to one because it has the potential to put more real estate bubble prices on the balance sheet of the government insured agencies. Fannie may don't get "bailed out" they are already government insured, if they can't pay the bill goes directly to us. Oh and don't get to excited the limits are temporary for this year- it's just an effort to slow down price declines and get more money into the economy from mortgage savings (which it will do). The limits will either go back to the old 417 or to whatever the new legislation sets it at. prolly around 600k for SFO. Prices for properties in SFO will still go down 30% (especially at the high end) it will just take a bit more time to get there.

Posted by: cooper at January 24, 2008 4:21 PM

I don't even know what's wrong with government bailout whenthe economy is going into recession? That's exactly what the government should do. Deficit spend is a classic (and reliable) economic stimulis.

I had problems with the government ranking up the deficit when the economic was going full speed over the last few years (and to a large extend, fueling the bulb). However, at this moment, the stimulis is needed and benefit all. It is not just about the housing market. It is about your jobs.

Especially when the alternative is stagnation.... or great depression 2 (as Satchel likes you to believe).

Posted by: John at January 24, 2008 4:32 PM

Cooper, you seem to have an odd idea about the government support for FM/FM. They certainly do not issue government backed bonds. If Fannie Mae went bankrupt, the government could choose to let them swing. It is the investors who assume the government would bail them out, but there's no covenant that assures this.

The support that FM/FM receive is in the form of Treasury borrowing. The GSEs can borrow directly from the Treasury using rates and terms which are not available to anyone else.

Posted by: Jeffrey W. Baker at January 24, 2008 4:43 PM

The thinking here on Fannie/Freddie is VERY muddled. They are government-sponsored private enterprises. Their status requires them to report to OFHEO as regulator, but it also lets them get away with other things that a private company could never (such as not filing audited financials - instant delisting for a private company in noncompliance for this long). They can NOT borrow directly from the Treasury. No one can. The Treasury borrows from savers/investors or from the Fed. It has no money creation ability of its own. The last time the Treasury tried to issue money was under JFK - the "red label" TRNs, distinct from the "Federal Reserve Notes" that we know as money.

The Federal Reserve Systen is PRIVATE. It is NOT part of the government. The US functioned perfectly well without the Fed - many people think it functioned much better than it does today. Of course, the Fed will not allow Citibank, for example, to "go under". Citi literally OWNS the Fed - well, a small part of it - Citi is a shareholder of the New York Federal Reserve Bank. The Fed itslef is owned entirely by its member banks, of which the NY Fed is the most prominent.

While there is no explicit guarantee of Fannie/Freddie by the Treasury (through its bond issuance powers), it is widely assumed that they would be bailed out. That is why they can borrow at very low spreads to Treasuries. A private company with the balance sheet problems of Fannie/Freddie would be forced into Chapter 11. No question about that.

The subsidy that Fannie/Freddie receive is very real, but it is subtle, and not understood by most people. Through the widely assumed backstop of the USG, Fannie and Freddie can issue mortage debt at interest rates lower than what would otherwise prevail in the market. That is precisiely why they were created (or their predecessors). This has had the effect of crowding out private lenders, who turned increasingly to risky loans and loan practices in order to regain "market share".

The true "cost" to the US of our socialized mortgage ssytem is enormous, but again, little appreciated. In essence, by "subsidizing" the housing market through the availability of special, lower rates, we have (1) overconsumed housing, leading to an enormous diversion of resources into housing which a true free market would have allocated more intelligently (no more foolish McMansions all over the place, for example); and (2) raised equilibrium housing values, which has allowed banks to extract ever increasing streams of income from the population. There is no tin foil about this. Unless these basic points are understood, it is almost impossible to have a real discussion about Fannie and Freddie.

Posted by: Satchel at January 24, 2008 5:02 PM

I've seen the 'august' regular members of this board post so much overwrought BS on this topic - of course backed by whatever statistic they think makes them look smart - that I'm really starting to think that I'm not gaining any knowledge by reading the comments anymore.

It's unfortunate, because I used to really enjoy learning about the market from the comments on SocketSite.

Posted by: Jordan at January 24, 2008 5:22 PM

Fannie /Freddie etc are government sponsored agencies. All the debt they issue trades implicitly on the assumption that if they failed, the government would cover the debt. That's why the spread has historically been so tiny. If they go under, rest assured, we get the bill.
To satchel--The Fed is not a private bank. We tried that once I think. All 12 Federal District banks are federal entities. So are all the FOMC members. The only thing I can think of that is private in the Federal Reserve is the money on deposit there. All the money is private if thats what you mean--I agree with that statement. I think the role of both the Fed and Fannie has been constructive--however there is something clearly wrong with the system as all these large increases in real estate prices were financed by this system--so something is broke and needs fixin. Don't know if I'd go as far as getting rid of the fed tho.

Posted by: cooper at January 24, 2008 5:22 PM

actually, you are both correct, but IMO Satchel is more correct.

The Federal Reserve System is quasi-governmental.

for instance, the Board of Governors of the Federal Reserve Sytem are a governmental agency. its governors are appointed by the President and confirmed by the senate. but only those 7 members are part of the govt.

But the Federal Reserve banks are private. they are owned by private institutions (banks etc).

The so called "member banks" are all private organizations.

Thus, you have a very confusing quasi-governmental status going on here.

overall, however, the Federal Reserve is politically independent, and thus I'd say it's more private than government.

Posted by: ex SF-er at January 24, 2008 5:34 PM

It gets a little esoteric for me when people start damning "the system". I like your contributions, Satchel, but you damn capitalists in one post and damn socialists in the next... so forgive me if I'm confused. :)

The system is what it is, whether you're a "capital-L Libertarian" or not. I don't like paying parking tickets either, but I do. Fannie/Freddie has been "socializing" housing for quite some time, right or wrong...

And I'm not sure I agree with your characterization of them as predatory competitors who crowd out private banks and force them to make risky loans. That seems pretty wacky to me.

Private banks sell conforming loans to Fannie/Freddie in the secondary market, but they are not forced to do so. Banks can choose to keep conforming (low yielding) loans on their books but it's profitable to pass them up the chain and collect fees along the way as the servicer.

Posted by: "Dave" at January 24, 2008 5:34 PM

To ex-Sfer.
All 12 Federal Reserve backs are offical agents of the US Treasury. They are not private. The Fed Chair is "independent" but not at all private. He is appointed by the Exec branch, confirmed by legistlative branch. Private to me means both capitalized and controlled by the private sector for profit purpose. The Fed doesn't really operate with a mandate to generate a profit. Its just there for price stabilty and employment. 100% not private even if there are elements such as deposits being private money. All my money is private until I give it to the government too in the form of Taxes! Once they get it, its government money.

Posted by: cooper at January 24, 2008 5:44 PM


Unfortunately, your money is not "your" money. It is an "asset" to you, but a "liability" of the Federal Reserve System that printed it. It is only backed (these days) by an implicit promise to maintain price stability. As you say, one of the Fed's (supposed) roles is to ensure "price stability". Sounds like we need to fire them, huh? Last I checked, since 1913 when the Fed took over the reins of monetary creation, using the government's own CPI calculator, the dollar has lost 95% of its values, and prices are up 20X!!

The idea that the member banks act as agents of the government through oversight of the Treasury almost seems a quaint anachronism, now that Goldman Sachs runs the Treasury!! But seriously, it is a funny sort of entity. While not truly private in the sense that it earns profits and answers solely to its shareholders (you rightly point out that there is no mandate to earn a profit, and I'd add that the Fed turns over its "profits" - interest on Treasury debt held on Fed balance sheet - to the Treasury every year), I would argue that its true mandate is to ceate the conditions for enormous profits by its shareholder banks. And at this, especially in the last 25 years of uninterrupted credit creation, I would say they have suceeded beyond anyone's wildest dreams!! I don't recall the exact percentages, but in 1982 the share of S&P profits "earned" by financial firms was on the order of 6%. By 2007, it was 30%. Not bad for just shifting some little green squares all around!

Posted by: Satchel at January 24, 2008 6:02 PM

Anyone care to recharacterize any predictions about spring and summer 2008 catastrophes for the SF market? Oh wait. Everyone is doing just that. (Subvocalize this in your best foiled Scooby Doo bad guy voice) "I would have been correct and pleased to watch other's misery if it wasn't for Uncle Sam!!!" Didn't somebody say something about error still being implicit even if the guv'ment steps in? Oh yeah. I remember who said that.

Posted by: ghost of fluj at January 24, 2008 6:32 PM

to Ghost of Fluj-- Prices in SFO for single family homes will still be a wreck this summer. These proposals help slow the decline but the end point just takes a bit longer. It helps the economy adjust to rapidly falling asset prices, but in the end you still get a continuation of rapid price declines. It's still gonna be horrible.

And Satchel. Oh geez--it is so my money. But yes I agree with your inflation concern. Oh and another thing, once this crisis passes --say in a year-- if inflation is still around the Fed will jack rates so high it will make people's heads spin. Unless we have solved the oil problem rates will be 8+%. Lock rates in while ya can.

Posted by: cooper at January 24, 2008 6:58 PM

Can I borrow money from FM/FM to buy some stocks? I know that by buying stocks I am contributing to this economy(companies do well, employees in the company do well, executives do well even more, more jobs created by companies, more city revenues, more spending..) Cmon this got to be a new stimulus package. Give everyone an etrade/tdameritrade account with 2000$ to buy stocks....

Posted by: SFwatcher at January 24, 2008 7:00 PM

I just refinanced my 5 year jumbo loan from 6% to 5.35%, and I am saving about $500/month. Not only that, about $150 more per month is going to pay off principal. $500 is a good chunk of change, and I make north of 300K/yr. I'm certainly going to be spending it on dinners, trips to Tahoe etc.

Don't know how anybody could see a 75bps rate cut, and increase in the conforming max to 625K as a bad thing. Rather, this is an absolutely amazing thing, especially since 77% of Americans own homes.


Posted by: Retro at January 24, 2008 7:12 PM

Prudent buyers will definitely wait for this package to get through the Senate and signed by GW before deciding on purchasing. So we will probably see some tapering off in transactions until this gets sorted out.

Posted by: SF Bubble at January 24, 2008 8:19 PM

Satchel: you are wrong. Fannie _can_ borrow from the Treasury. The Treasury has extended both Fannie and Freddie $2.25b lines of credit. Aside from actual government agencies, only the housing GSEs have access to Treasury credit. It's right there on page 13 of their 10-K:

The Charter Act authorizes us, upon approval of the Secretary of the Treasury, to issue debt obligations and mortgage-related securities. At the discretion of the Secretary of the Treasury, the U.S. Department of the Treasury may purchase obligations of Fannie Mae up to a maximum of $2.25 billion outstanding at any one time. We have not used this facility since our transition from government ownership in 1968. Neither the U.S. nor any of its agencies guarantees our debt or mortgage-related securities or is obligated to finance our operations or assist us in any other manner.

Posted by: Jeffrey W. Baker at January 24, 2008 8:24 PM

Basically there will be a sale on homes in the next couple of months as the interest cut works its way through the system. There will also be mortgages available and people will have an opportunity to refinance and keep their homes. This will stabilize the fall, but with spring there will be more supply and deals will out there to be had and money will be cheap. All of you that missed the boat last time, shine up your credit, get your down payment together, and buy a house this year. Prices may continue to decline but the latest acts of desperation by our gov.t will have some impact and prices will stabilize so there will be a good window for getting into the market. Good luck!

Posted by: viewlover at January 24, 2008 9:07 PM


That's interesting, thanks for that, I didn't know that the Treasury was authorized to buy Fannie/Freddie paper directly, but I guess it's no longer used. I would guess that the Treasury has to issue debt to the public to fund the purchase (or else issue the debt directly to the Fed and then disclaim the debt - monetization). Nevertheless, I'm sure you'll agree, a $2.25B facility that hasn't been used in 40 years is pretty inconsequential for a GSE that retains something like $700B of debt on its books, and has "guaranteed" something like $1.5T+ more. And, I guess it's not technically a "borrowing" - more like a sale of assets, but still, pretty interesting that this ability of the Treasury still exists.

Posted by: Satchel at January 24, 2008 9:14 PM

"All of you that missed the boat last time, shine up your credit, get your down payment together, and buy a house this year."

Thank you for your advice mister realtor!


Posted by: anon at January 24, 2008 10:09 PM


The rate cut might lead to inflation, which punishes anyone who saves. It can also weaken the dollar, which hurts anyone who buys imported goods or services. There's no free lunch in economics.

And as has been explained, the conforming limit increase shifts risk from private entities to the government (maybe not, but I can't see congress not bailing out the GSEs). As a taxpayer w/o a mortgage that needs refinancing, I'm not sure why I should be asked to subsidize other people's RE purchase.

Another thing to consider with the conforming limit being raised: part of the reduction in rates the GSEs can pay on their bonds is based on geographic distribution, since the national market is seen as safer than local markets. If the raised limits only affect certain areas (urban CA and east coast), the bonds are no longer as safe. Will the market price this in when the GSE tries to sell the bonds backed by larger mortgages? Only time will tell....

I am hoping that sanity, in the form of OFHEO or the market for GSE bonds, prevails and jumbo loans don't get any cheaper.

Also, it will be interesting to see how the race between increasing LTVs (due to falling prices) and the new standards works out, especially in light of the scrutiny the appraisal business is going to be under in the coming years. Lots of people who thought they might be able to refinance might be left out in the cold by the time their applications work through the system.

Posted by: amused_in_SOMA at January 24, 2008 10:18 PM

This has been a fascinating and informative discussion. It's more clear to me now that the proposed actions are wasteful, inefficient, and unnecessary govt meddling that will hurt most taxpayers. The GSEs have and will continue to distort the market and drive up the price of housing to the detriment of most. We need to get the G out of the GSEs (and most everything else).

Posted by: arlo at January 25, 2008 8:07 AM

As far as I can tell, the maximum debt-to-income ratio permitted by Fannie Mae and Freddie Mac will not change in this bill. They allow a maximum of 28% for the front ratio (housing expense-to-income -- i.e. mortgage principle, interest, taxes and insurance divided by gross monthly income) and 36% for the back ratio (total monthly obligations-to-income). You would need a pretty large documented income and sizable downpayment to see any advantage from these new limits, if they go through. Again, a nice present for those willing and able to buy anyway or for those looking to refi, but I don't think this would affect the size of the pool of buyers much. The recent run-up was driven by buyers putting little to nothing down and borrowing far in excess of these ratios.

Posted by: Trip at January 25, 2008 8:18 AM

You are right Trip the income ratios don't change. And that's a persuasive point. It'd be more persuasive if they put in a required 20% deposit with all new loans just to share a bit of the risk and keep people from easily walking away.

Posted by: cooper at January 25, 2008 8:39 AM

anon, not a realtor here, just looking for a silver lining :)

Falling interest rates and falling prices should make for a (limited) good market, right before inflation kills us. But its coming no matter whether we agree with it or not and we'll pay for the low interest rates and teh stimulus package 10 times over more than likely. Might as well get something out of it if you can. And hell, I'm not even getting any money from the stimulus package, yet I'd be the first to spend it. Oh well.

Posted by: view lover at January 25, 2008 9:09 AM

Cooper, 20% requirement IS in there.

I haven't read ALL of the posts here, but I don't see what all the upset is about. There is not automatically an increased risk in issuing a $625k loan.

All of the other requirements remain, including debt to income ratios, loan to value ratios (80% max), etc. A $600k loan can have less risk than a $400k loan. It depends on the borrower, the market, and the property a lot more than it depends on the size of the loan.

As someone still on the sidelines waiting, I know this could provide some price support, but I don't think it's much. It will lower rates for mortgages in the $417k to $625k range and thus make those mortgages more affordable for qualified buyers. But if you have less than 20% equity, this doesn't help you. If you do, then more power to you. Go reduce your monthly payment and spend that cash elsewhere, which should be good for the economy.

Posted by: timkell at January 25, 2008 9:55 AM

So, if there are so many restrictions ( 20% down, 28% front, 36% back). How come homes worth less than 417K(not in bay area for sure) going into foreclosure/default?

My guess would be that banks who issue these loans and sell it to FM/FM doesn't follow all the restrictions, and FM/FM doesn't even bother to check if banks did. If not we wouldn't be in this mess anyway.

So, what will change moving forward?. Banks can still give 700K loans with no documents and sell them to FM/FM. This inturn reduces their liability of extra 283K(which they are trying to sell to investors using CDO's orSIV's right now and getting squeezed....)

Posted by: SFwatcher at January 25, 2008 10:58 AM

You're missing the point. A conforming loan must meet all the criteria. Fannie doesn't just decide not to check... So no, you won't see banks selling no-doc loans to Fannie at 700k or any other value.

Look at Fannie's default rate compared to non-conforming default rates or (for even more dramatic comparison) look at subprime default rate. You'll find that conforming loans are performing far, far better.

Trip is right. This won't make a huge dent for all the no-doc people swimming in debt they never could really afford, but it'll help New Yorkers and San Franciscans and free up some loose change for the economy...

Posted by: "Dave" at January 25, 2008 11:41 AM

I'm sure we will see lots of analyses of the potential effects of this move, but here is one that is interesting -- predicts that it might result in higher jumbo rates, even for those who would fall within the current 417k limit. The rationale is based on the CDO market, and I don't even pretend to understand all the intricacies of the issues. But here are some excerpts of a Reuters piece:

"Increasing the eligible loans to $729,750 from $417,000 would change the characteristics of mortgage-backed securities, leading traders to exact a premium for increased interest-rate risk.

Borrowers with large, jumbo loans are more likely to refinance since their savings are greater for each incremental drop in rates than for a smaller loan. The loans will taint the bonds since traders don't initially know the make-up of the securities known as "agency" MBS.

Higher mortgage rates would make it even harder to unload already high housing inventories and existing homes on the market, delaying any housing recovery and potentially extending the U.S. economic slowdown.

"The amount of money that investors are willing to pay for agency mortgages (bonds) could be lower if these loans are TBA deliverable and so mortgage spreads could widen," said Ajay Rajadhyaksha, co-head of U.S. fixed income strategy at Barclays Capital in New York, who will listen to the SIFMA meeting by phone.

Mortgage rates would rise for the "vast majority" of agency-eligible borrowers, he said.

"When you start throwing a lot of jumbos into a pool you spoil the fungibility of the collateral," said Linda Lowell, a mortgage market veteran and principal of Offstreet Research LLC. "That has made the market as liquid as it is. Home owners have benefited from lower mortgage rates."

Posted by: Trip at January 25, 2008 12:00 PM

As a potential first home buyer all I can say that this is fantastic news. I have been utterly flabbergasted at the fact that I need a jumbo loan just to buy an average house in the Bay Area. I am right on the cusp of being able to afford the home I want and being dangerously house-poor, so I have balked at bidding for some fabulous houses. Reducing the interest rate by 1 point (with a conforming loan) allows me enough room (about $400 less per month) to be confident of buying.

Posted by: misfithero at January 25, 2008 12:06 PM

"So, if there are so many restrictions ( 20% down, 28% front, 36% back). How come homes worth less than 417K(not in bay area for sure) going into foreclosure/default?"

Well, because people got a conforming loan, got another loan for somewhere between 0 and 20%, and now they're defaulting on both instead of getting one loan for 90% and paying PMI.

I don't think anyone's paid PMI for the past 5 years!

Posted by: timkell at January 25, 2008 12:21 PM

anon 10:09 sez ... "Thank you for your advice mister realtor!"

... in response to viewlover's post suggesting that it might make sense to get your house in order if this summer turns out to be the right conditions to buy.

It is a knee jerk reaction to assume anyone even suggesting that a good opportunity to purchase is on the horizon is a realtor. Lets face it, most of the posters here want to buy at some time. Its just a matter of when.

Actually viewlover's suggestion is simply good advice. If there's a possibility that conditions to buy might be ripe then it makes sense to make sure your finances are in order.

If you've ever observed how cats (both big and small) hunt you will see that they spend 99% of their time conserving their energy, chillin in the shade. They might appear as if they are nearly asleep but they are constantly observing their surroundings. If a promising opportunity appears they will crouch and ready themselves for the pounce. Most of the time they decide not to pounce and go back to chillin. Cats are careful to conserve their energy and only initiate a chase when the odds look very good.

Home hunting in a constrained market like SF is much like this, or at least has been for a couple of decades. There's no harm in being ready. Just be sure that when you pounce that the situation is right.

Posted by: The Milkshake of Despair at January 25, 2008 12:23 PM

This plan is backfiring in a big way as rates are now projected to go UP, not down.

As I predicted yesterday at 1:55pm.

Shares in both agencies are WAY down this morning.

My guess is that by the time the law is enacted, they raise conforming loan limits by 10% and leave it at that.

Anyone who wants to lower their asking price to $500K is going to get a modest boost. Everyone else, you're back where you started, and heading down.

Posted by: tipster at January 25, 2008 12:42 PM

"So, if there are so many restrictions (20% down, 28% front, 36% back). How come homes worth less than 417K(not in bay area for sure) going into foreclosure/default?"

Also, just because a loan is within the conforming dollar limits does not mean that Fannie or Freddie would or could buy it. The no-down, no-doc, neg-am crap that is causing the most obvious problems was not sold to Fannie or Freddie but to others in the market who -- in what is now recognized to be a wave of terrible judgment -- were willing to buy up any garbage the lenders packaged up. To be "conforming" a loan has to meet all the requirements, not just dollar limits.

Posted by: Trip at January 25, 2008 12:45 PM

There are a couple of big counterpoints to the argument for higher interest rates if the conforming loan limit goes up.

First, remember, this is really only going to effect California (mostly northern CA) and parts of the east coast- maybe some of Florida. Virtually everywhere else you can buy without a jumbo loan. There seems to be very little chance that raising the conforming loan limit will outweigh the overall decline in economic conditions, including declining home prices and sales, as the factor most determinative in setting rates. The poor economic outlook is leading to lower bond yields (see today's treasury rally), the stock markets are tanking, and there has been a limited effect on the dollar from the latest rate cut.

Second, banks want this as they will make tons of easy money in fees from the refi's and Fannie really want this and have been asking for this for months.

As a result, there are more factors to suggest that rates will actually continue to fall than that rates will rise. Conforming loan rates are now at their lowest level since 2004. Overall, it seems unlikely that Fannie/Freddie will be buying enough formerly jumbo loans to cause rates to increase.

Posted by: anono at January 25, 2008 1:38 PM

SF market to get clobbered this spring and summer -- Cooper.

Rates to go way up -- Tipster.

I'm taking notes on the (b)errors.

Posted by: ghost of fluj at January 25, 2008 2:27 PM

Let me be clear:

The increase in loan limits will cause interest rates on what were formerly conforming loans to rise to that approaching the jumbos because all types of loans will now be mixed into the same batch.

Interest rates for sub 417K loans will also rise higher than they would otherwise because a larger group of borrowers is going to be chasing the same money.

But will interest rates as a whole be higher or lower in 6 months. No one knows.

My point is that the effect of the increase in loan limits will be to raise interest rates on housing in general higher than they would be if they hadn't raised the loan limits.

Posted by: tipster at January 25, 2008 3:51 PM

Tipster--no that won't happen. The only reason that conforming loans are lower is because they can be taken by FannieMae/agencies. Jumbo loans can't which is why the rate is so much higher. It's really kinda misleading what you are saying and very unlikely to be true. That said, since Fannie is already at its cap--the total amount of loans won't increase unless they raise equity. It really won't do much to get more loans done whether the cap is 417k or 40 million. Either way, it should not raise the cost of funds of fannie mae conforming paper, regardless of the limit.

Posted by: cooper at January 25, 2008 4:30 PM

Tipster, I don't understand why you would think that. I'm not going to say you're wrong yet, but I don't see it that way. If a loan in conforming, Freddie and Fannie pretty much guarantee they will buy it. They will then stamp it with their seal of approval and sell it to the bond markets who, with that seal of approval, will assume that Uncle Sam will pay if the home buyer can't and Freddie/Fannie can't.

The lenders are not taking any more risk with these loans than with sub $417k loans. So why would rates go up for all of them?

As I understand it, the low rate hinge on that government seal of approval, not on the limited pool of mortgages.

Perhaps I'm missing something, but I'm not getting how rates will go up in this scenario.

Posted by: timkell at January 25, 2008 4:33 PM


I agree that rates could go up, and the idea is already taking hold in the press. It will be very interesting to see how the secondary market reacts. Considering how nervous everyone is about mortgage-related securities, adding uncertainty to them might not solve any problems at all.


Posted by: amused_in_SOMA at January 25, 2008 6:59 PM

"Increasing the eligible loans to $729,750 from $417,000 would change the characteristics of mortgage-backed securities, leading traders to exact a premium for increased interest-rate risk.

Borrowers with large, jumbo loans are more likely to refinance since their savings are greater for each incremental drop in rates than for a smaller loan. The loans will taint the bonds since traders don't initially know the make-up of the securities known as "agency" MBS."


Posted by: ExTrader at January 25, 2008 7:09 PM

"As a potential first home buyer all I can say that this is fantastic news. I have been utterly flabbergasted at the fact that I need a jumbo loan just to buy an average house in the Bay Area. I am right on the cusp of being able to afford the home I want and being dangerously house-poor, so I have balked at bidding for some fabulous houses. Reducing the interest rate by 1 point (with a conforming loan) allows me enough room (about $400 less per month) to be confident of buying.

Posted by: misfithero at January 25, 2008 12:06 PM"

be careful what you wih for. you dn't want to jump in a market like this when you can barely afford it. It sounds like you are about to step in the trap the govt. is setting for you. you will be burdened by a incredibly expensive depreciating asset. regardless of all the funny money and fancy loan schemes that are artificially popped into the economy, housing prices are 30-50% higher than what they should be in the bay area. all the govt is doing is robbing peter to save paul and economics will eventually catch up. buying now is a losing proposition even if you can "afford it". IMO, if you are paying more than 3.5x your income for a home, have less than 20% to put down and are not taking out a 30yr fixed rate, then you cannot afford the home.

Posted by: spencer at January 25, 2008 7:49 PM

Nice observation, Milkshake of Despair. I think I like it!

Posted by: movingback at January 25, 2008 8:25 PM

amused_in_soma, if I'm interpreting that article correctly, they are worried that rates on jumbo loans may go up, not conforming loans.

Of course the definition of jumbo will be changed pretty dramatically when these changes are made.

I do think long term this is probably a bad deal. In order for normal lenders to compete and make money in mortgages, they might have to go further out on the risk curve than they would like to. This is just handing a huge market share to Fannie and Freddie, and the lenders will have to adjust to create a winning business model.

Long term, this could have some macro impacts on rates, but short term I think it's clear that those loans that were formerly jumbo should be able to refinanced for much lower rates. If they stick to ending this on December 1st, this could be a nice real stimulus package which will put money back into the economy in a number of ways.

But when (not if) they end up making this permanent, I think it's a bad move.

[Editor's Note: As proposed, the stimulus package could very well have the unintended effect of raise conforming rates across the board. It's not only repayment risk that bond holders worry about (and is priced into rates), but prepayment risk as well (which increases with the size of the loan). More on Monday. And as always, thank you for plugging in.]

Posted by: timkell at January 26, 2008 11:39 AM

timkell, I think the article is relaying the concern that rates on conforming loans will go up, not on jumbos. "'The amount of money that investors are willing to pay for agency mortgages (bonds) could be lower if these loans are TBA deliverable and so mortgage spreads could widen,' said Ajay Rajadhyaksha, co-head of U.S. fixed income strategy at Barclays Capital in New York, who will listen to the SIFMA meeting by phone. Mortgage rates would rise for the 'vast majority' of agency-eligible borrowers, he said."

The referenced "agency mortgages" are conforming loans.

In other words, because of changes and resulting added uncertainties to the pool of conforming loans packaged and sold by Fannie and Freddie, investors will pay less for them, raising interest rates.

Who knows if this will result or not. But it points out the difficulties of trying to make quick fixes to a huge, complex market. The result might be the opposite of the intended one.

Posted by: anon at January 26, 2008 12:04 PM

Ah, I see then. I don't think that would be nearly as dramatic as the reduction for the formerly jumbos, but yes, I can see what you mean.

Perhaps it could be remedied by making two classes of conforming loans, sub 417 and above 417. I would think investors deserve as much transparecny as they can get, but I'm sure that won't happen.

Posted by: timkell at January 26, 2008 1:59 PM

The other posters have made my point more eloquently than I could ever have hoped to.

My only addition is this: the total investment pool changes constantly, and the rates change accordingly. As you make changes to the mix of any given product, some people will be attracted and others will be turned off. Rates change accordingly. But it is fluid, not static. You can't make such a huge change and expect that everything else will remain constant. Investors don't have to stick around if they don't like what they see.

And remember, FM/FM are BANK - RUPT! Got it? That's why a company doesn't issue financial statements for years. If they did, the world would see they are BANK - RUPT. So all an investor has is *not even* a *verbal* guarantee that they would be rescued. So their bonds are hardly like US treasury bonds. There is an element of risk to them. That risk will change as the mix changes. And it will change for 100 reasons. Interest rate risk is one reason. Simple supply and demand is another: if the demand doubles and the supply is constrained by loan limits, you get higher prices. There are a host of variables, and the interest rate will do one thing for sure: NOT STAY THE SAME!!

Everyone just ASSUMES that the investment world is static: if rates are X, and you totally change the mix, rates will remain X, when all you have is a flimsey backstop, not even a promise, backing a bankrupt company. I think rates will change in ways we can't even foresee.

To use an analogy, when my girlfriend with her smiking hot body hops in our hot tub when I'm sitting there, the water level stays about the same. But she just has hopped in with ten of her girlfriends, and even though all of her girlfriends are naked and lithe, the water level has changed dramatically. I totally just lost my train of thought. I'll be right back...

Posted by: Tipster at January 26, 2008 2:24 PM

Editor wrote:

It's not only repayment risk that bond holders worry about (and is priced into rates), but prepayment risk as well (which increases with the size of the loan).

Pardon me if I sound like the finance newbie that I am, but are you saying that bond holders worry about debtors paying off their note early (the aforementioned "prepayment risk")? Given the possibility of massive defaults and inflation/exchange rates eating away at the value of the dollar, it would seem like prepayment should be the least of a bond holder's concerns.

Also, can you really state that the probability of early payment on a loan correlates to the size of the loan? Is this due to increased diligence on behalf of larger bond issuers in seeking out cheap money?

Posted by: GiddyHitch at January 27, 2008 6:28 AM


Yes, although it seems counterintuitive, bondholders do worry about the note paying off early. This is mostly because of the concept of reinvestment risk. When a note pays off early, it is typically in an interest rate environment in which prevailing rates are lower than those under which the original loan was made. The original noteholder thus has to reinvest the proceeds from the prepaying asset at lower rates than originally forecast. For this reason, there are often prepayment penalties, as well as a spread built into the original loan interest rate to compensate the lender for this risk of prepayment/reinvestment risk.

As for the size of loan issue, the thinking is generally that larger loans are more likely to prepay (in lower interest rate environments) primarily because it is more efficient to prepay a larger loan (relatively fixed costs like title search, closing costs, etc. versus the large interest cost savings from larger loans). Also, another unknown concerns the relative sophistication of people taking out larger loans - i.e., they are more likely to be more financially savvy, and have more financial options, leading to increased likelihood of prepayment events. My best guess is that the jumbo conforming market will ultimately become segmented, with large conforming loans (greater than, say, $300-400K) carrying somewhat higher interest rates than the lower dollar value conformings to reflect these increased risks. But it will take some time and trading experience to sort all this out IMO.

Posted by: Satchel at January 27, 2008 7:44 AM

To the earlier poster regarding why prepayment risk matters: Prepayment risk matters because people with jumbos are more likely to refi at smaller differentials in rates. The guy who said he refi'ed a 6% loan to 5.375% is the textbook example of this. Makes sense to refi if you can save $500/mo but not if you are someone who could only save $50/mo. What bond holders want (and price in) is the stability in the pool of securities underlying the bond. Make sense?

The fear is that increasing the conforming loan limit will cause rates to increase so that bond holders can be compensated adequately for taking greater prepayment risk.

Posted by: Argumentative at January 27, 2008 6:22 PM


Thanks for the insight. I hadn't considered the fact that if someone is prepaying their note, it is most likely due to better financing rather than a financial windfall/greater cash flow (duh), and that in such an environment, it would be hard to generate returns equal to the original bond.

I had actually considered the financial acuity of the individual able to secure a high value loan, but in my limited experience, a high-income individual (which admittedly isn't the same thing as a high net worth individual) is not any more likely to be financially savvy than their lower income peer. This seems to hold true even in the finance industry. I always thought it analogous to the doctors with very unhealthy lifestyles and the mechanics with the cars that never run right.

With regards to the proposed increase on the conforming loan limits, I think it's ridiculous that there has been a blanket cap for the whole country for so long. It shuts out entire regions like the Bay Area while funding McMansion purchases in the rectangle states. Tying the cap to some sort of local metric (in spite of the various mean and median arguments) would make a lot more sense. Given the shaky financial health of FM/FM right now though, now would not appear to be the time to be radically changing its operating guidelines. At least not without a serious shoring up of its finances, reporting, and vetting processes.

Despite my objections, you can bet that I'll try to be the first in line to refi my first before the whole thing implodes. It will be nice to roll the freed up cash into my second and make good on the prepayment risk.

Posted by: GiddyHitch at January 27, 2008 9:36 PM

"bondholders do worry about the note paying off early."

This is what I just dont understand about this whole subprime mortgage security meltdown stuff.

Wasn't the whole point of a subprime loan that the interest rates start off low, reset later and the home buyer could count on the value of the home increasing enough for a refi before the reset?

In that case, shouldnt the bond investors have recognized that there was high likelyhood of an early payoff and the true term would have likely never occured in the first place ? ?

Posted by: Newbie at January 28, 2008 9:26 PM

This thread has gotten way to long for me to try to catch up on, but I am very much looking forward to this passing. I, too, will also try to be first in line -- ok, second, in line to secure this loan. If it passes, I know for certain, I will buy within the next year.

Posted by: S&S at January 28, 2008 9:29 PM

What makes anyone think that by increasing the loan limit for certain areas that the rates will fall in line with the "real" conforming loan amounts ($417,000 or less). I think this bill is more about helping the lenders "put" these loans somewhere. Why else would the bill be effective for loans originated in July of 2007 and only be good until Dec. 2008. I think the pricing might be better than non-conforming pricing today, but I highly doubt it will fall in line with conforming prices

Posted by: Nic at February 8, 2008 2:19 PM

With the secondary market currently unwilling to purchase anything that is NOT a first lien, the conforming loan limit increase will allow some of those who still have equity remaining to tap into it to help weather the storm (individually if need be), and as a result, will soften the very hard landing the economy needs to be bracing for. I am for any measure that will aid in reducing the negative consequences of the ridiculous euphoria which led to what have been come to be known as the 'housing bubble' and the 'liquidity crisis'. Much more needs to be done before we'll be able to climb out of the hole we're in the process of falling into. Short all retailers. Short all major banks. Move 80% or more of your investments to bonds and solid, dividend yielding stocks (non financial). Get liquid and wait for opportunities. They'll come. We just need to be ready. And just to be 'argumentative', will they allow you to subordinate your current second when you refi to the new larger conforming loan? If you're lucky, they may modify the loan size so the CLTV remains constant with when it was originated. If, however, your home is worth significantly less now, you may find yourself in a difficult predicament. It would pay to check with the lender who issued the note as to their subordination policy/protocol. Hope this helps.

Posted by: Mike at February 12, 2008 11:17 PM

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