January 31, 2008
Senate Advances Stimulus Plan Without Any Loan Limit Adjustments
As a plugged-in reader notes, while the House has approved a “Stimulus Plan” which includes the much ballyhooed increase in conforming loan limits for California, the Senate is advancing a package which does not. Game(smanship) on.
And yes, we still owe you our thoughts on the whole shebang.
UPDATE: And as another reader notes below, "Republicans are filibustering it and 60 votes are needed for it to pass. According to the NY Times, Sen. Schumer says they will pass the house version if they can't get 60 votes for the Senate version."
∙ House Approves Economic Stimulus Plan [New York Times]
∙ Conforming Loan Limits: A Placeholder For Discussion And Analysis [SocketSite]
∙ Senate Democrats Short of Votes for Stimulus Bill [New York Times]
First Published: January 31, 2008 9:20 AM
Comments from "Plugged In" Readers
Looks like the Senate version of the stimulus bill has removed the provisions to raise limits for conforming loans. See:
May be a good thing or a bad thing for rate-watchers depending on whose analysis you buy . . .
Posted by: Trip at January 31, 2008 8:05 AM
Well at least someone in the Senate is thinking clearly. If they really want to funnel more debt into Fannie and Freddie, so be it. But at least wait until March. Both companies need to file their 10-Ks (annual reports) by 3/31/08.
Assuming they're able to file on time, and losses aren't going through the roof, an increase may be in order. Rate levels aside, let's at least wait to see the numbers.
Posted by: Dude at January 31, 2008 9:02 AM
The Senate knows how bad the House and Whitehouse want the rise in conforming loan limits, so the provision will be added back in during the conference as a trade-off for the Senate's extra provisions they are putting into the bill.
Posted by: anono at January 31, 2008 9:10 AM
Good sentiment about Fannie, but don't hold your breath. If they actually file their 10-K, you can be certain it will be fraudulent, sanctioned at the highest levels by OFHEO (Lockhart is a good guy, and you can be sure he will be dragged kicking and screaming into ok'ing this) and the political establishment. No tin foil here - the only number you need to know is that Fannie has $40B in capital supporting more than $2 TRILLION in guaranteed assets or assets retained on its books. It's insolvent, plain and simple, but you can be sure that IF the 10-K (and back 10-Ks) get filed, they will not indicate this.
On a related tin-foil note, you might be interested to note that the SEC is now officially sanctioning "relaxation" of the accounting rules, so that banks do not have to show balance sheet insolvency (the article doesn't say that exactly, but use your imagination a bit and ask why the "enron" style rule change/relaxation now, when everyone is so concerned about "transparency"):
Last, about the conforming limits. I have a theory that increasing the conforming limits will actually ACCELERATE the price decline in housing in the "glamour" areas. Right now, much of the market is locked up (to some degree, not frozen shut of course). "Reliquifying" the market at the $500K - $900K market might just allow quicker "price discovery". It's sort of analogous to the banks' predicaments: if we let the toxic junk trade, we just might find out how much value it's lost! I don't want to overemphasize this theory, but it will be interesting to watch.....
Posted by: Satchel at January 31, 2008 9:20 AM
Except that the Senate Dems plan doesn't have the votes. Republicans are filibustering it and 60 votes are needed for it to pass. According to the NY Times, Sen. Schumer says they will pass the house version if they can't get 60 votes for the Senate version. I think the Senate Dems are holding the conforming loan limit provision hostage to get increases in other parts of the plan such as extended unemployment benefits.
Posted by: anono at January 31, 2008 9:35 AM
Would be interested to see if anyone agrees with me on the following related to the conforming loan limits (this is in theory, as i know that adding debt to fannie and freddie is not desirable in the reality of the moment)
it is neither feasible to have all 300M people in the US live in the same place, nor desirable from the federal perspective. the result is that there will be natural differences in the desirability/buildability of the land in different locations, as well as local economic situations that form over time. i think it is therefore both unrealistic and unfair to apply the same lending standards everywhere, because isn't the intrinsic value of the collateral (homes, buildings) different? i know so many people in the South, Midwest, Northeast, etc. who have 4 bedroom homes bought with conforming loans, and then get to have multiple cars, boats, 2nd homes etc. with the rest of their discretionary income. people at the same income levels here can barely get a home at all (initial cost barrier) and then get hit on the loan rates because - who can buy a place here without a jumbo loan? it's so, so challenging for first time homebuyers to get into the market here, especially if you have a family where you need more than 1 bedroom. seems to me like the metropolitan indexing (with reasonable limits/maximums) is both fair and desirable to encourage home ownership all over the country.
Posted by: TheRealScoop at January 31, 2008 10:04 AM
Isn't the real problem that Californians (and especially in the glamour regions) are simply not "wealthy" enough nor "productive" enough to afford the prices?? I mean, why interfere with market forces - through implicit subsidization by the Federal taxpayer - in order to prop up prices? Why subsidize foolish policy choices by Californians (such as Prop 13, "below market rate" assistance programs, high state taxation, large welfare bureacracy, etc. - ok, flame away!) in order to levitate home prices above their natural level? Although homeownership has important societal benefits (as you allude to), does it really make sense to subsidize homeownership by those who cannot afford the prevailing price levels?
I know it sounds harsh, but if Caifornia was THAT special, and the people here were THAT special, why don't they just walk into their employers' HR departments and demand coordinately higher salaries?? Again, why should buying a home be unaffordable ANYWHERE? The country is mobile, as you note. Why wouldn't people just move if they cannot afford it, or make the calculation that the prospects for being in, say, San Francisco outweigh the detriment of having to live at a very low standard of living relative to what their productive labor could engender in some other region?
One of the major things that has bothered me - and I think a lot of people who think about the fraud and waste of this housing bubble - is the speed with which the average person has accepted that prices are accurate reflections of the underlying desirability and future prospects of the region being examined. California is a GREAT place. SF is a GREAT place. Just not great enough to justify the current prices, and not 100% greater (in many neighborhoods) than it was a mere 5 or 6 years ago.
Posted by: Satchel at January 31, 2008 10:44 AM
When the economic stimulus bill ultimately gets passed by the Senate though, I still believe an increase in conforming loan limit will get included. As mentioned in other articles (not this one from the NYT), the conforming loan limit will certainly be up for discussion later this week on the Senate floor. Even though it wasn’t included in the verbiage of current proposal, it will very likely be included in the one that gets sent back to the House.
I’ve also been following some of the discussion here about the increase in conforming loan limits, and many posters here are calling it a bailout. I personally think the increasing in conforming limits is long overdue, and it’s one of the better things that congress is working on these days. I remember moving to San Francisco almost ten years ago, and even then – you needed a jumbo loan to get a 2br condo in a nice neighborhood. It’s almost a decade later, and they still haven’t updated the limit to accommodate the purchase of an average home. In my book a “bailout” is a government subsidy to help some entity that is at risk of bankruptcy or insolvency. The conforming loan limit increase is a change in policy to fix something that should have been fixed years ago. Is repealing or updating the Alternative Minimum Tax a “bailout” too. How is this any different really?
Posted by: Lance at January 31, 2008 10:53 AM
10 years ago the conforming limit was $227,150. San Francisco had no problem levitating the prices up well beyond the conforming limits over the past 10 years, even as the conforming loan limit was raised. Now, we arrive at the situation where the marginal buyer is not "productive" enough to afford the current prices. Thus, prices should fall. What you are implicitly looking for is a bailout of the people who bought during the runup - or more properly during the tail end of the recent run-up - so that they should not have to face the consequences of their purchase. For many, a decline of 10-30% won't matter anyway. In order to try to support prices of assets purchased recently, you want to heap debt upon quasi-public companies which are themselves almost surely bankrupt. Obviously, the US never should have had these quasi-public monsters, Fannie and Freddie (I'd throw FHA in there as well). Now that we're stuck with them, let's not compound the error!
Posted by: Satchel at January 31, 2008 11:05 AM
RE increasing the limit. Personally, I'm against the whole concept of subsidizing mortgages through Fannie and Freddie anyway. I'd rather have a completely open/unsusbsidized real estate market.
But, if we're going to have even the idea of conforming loans, the $417k limit doesn't seem to make sense to me. If I had my choice, I'd eliminate the subsidy completely. But since that's not on the table, I'll choose option B, which is to make them available in places I want to live. No point in me susbsidizing housing in Nebraska if I can't get a chance to eat at the trough too.
Posted by: timkell at January 31, 2008 11:21 AM
Satchel, you are right about bubbling in the market, but I still think that many properties are out of reach of most of the population here in terms of being within current conforming loan limits - even after a major correction in the market. I'm single, but really empathize with families who are challenged to buy a place here for the first time. I hate to see people leave the city in order to find affordable property elsewhere (and doubly disturbed by the small number of really good public schools here, which might even be a bigger factor in the exodus).
I think cities are a good thing in terms of efficient resource usage (e.g. public transit, not individual huge lawns to water, etc.) and certain places will just naturally have increasing prices due to that fact alone + special factors in the area. True, California is perceived as "special" in many ways (weather, diverse & interesting landscapes). But I also think of NYC being in the same boat...the "water" factor SF and NYC share compresses building and drives up prices. I don't see how having a city of only wealth people or one where there is such a disproportionate number of renters is a good thing long term. Indexed conforming loan limits will lower rates and help (certainly other things are needed, too) the "little guy" get things that others have access to just by virtue of living elsewhere.
Posted by: TheRealScoop at January 31, 2008 11:59 AM
Satchel – the point is that the conforming loan limit is poorly indexed and hasn’t aligned with the prices of homes in the Bay Area for years. Yes, the conforming limit was $227K ten years ago, but the average priced home was $250-350K (depending on the county). You can look up the numbers on Dataquick. San Francisco has never been affordable for most people, and I doubt it will be in our lifetime. You obviously have a strong economics background, but this seems like simple supply and demand at work to me. Yes, low interest rates and the lack of mortgage regulations might have led to “easy money” and you could argue that it artificially boosted demand (i.e. – shifted the curve). That’s probably a good assessment, and I wouldn’t disagree. In hindsight it was a big mistake. However, do you really think the government of the world’s largest economy is going to sit idle while the things go into a free fall due to a mistake? Of course, they won’t. The job of the Fed and congress are to respond to market conditions and keep the economy growing. When things are going well, they throttle it down and when they are going poorly – they throttle it up. Economists like steady growth, and I’m sure you already know that already. Right now, there’s a lot of upward throttling going on, which should keep prices of Real Estate in San Francisco exactly where they are IMHO. In places like Modesto, they’ll keep dropping for a while.
Timkell – I don’t disagree with you on your callouts on Fannie and Freddie. It’s debatable whether having government insured loans is a good idea at all, but if you have them – the limit needs to make sense. Right now, it makes sense if you live in Bowling Green Kentucky but not for SF. That was also true ten years ago….even if it was less true.
Posted by: Lance at January 31, 2008 12:02 PM
I understand where you are coming from - believe me I do! About whether the Fed cares about homeowners and whether it and the government will sit "idly by" in the event of a free fall, well, yes, I think that is exactly what they will do. In fact, nothing has stopped the collapse in markets like Modesto or Phoenix or Fort Meyers, Florida, and there are no conforming limit problems there! Well, they will try to get involved of course, now that the glamour locations like LA, SF, DC and NYC are arriving to the party, and that will make it worse. Just a personal opinion!
Of course, politicians and economists would prefer steady growth, and would love it if they really could throttle the economy up and down at will. Unfortunately, that is not the way it works, and for the first time in well over a generation, if I am right we are about to rediscover that simple truth that we have forgotten.
I really think that faith in the Fed and the government is going to be the last bubble to burst. The Fed and the government made a mess of things in the 1930s. They didn't do too good of a job at the end of the 1970s through the very early 1980s. Believe me, they are no smarter today. If they were, they would not have allowed twin massive bubbles (equities at the end of the 1990s, housing in the early 2000s) to develop - never before in recorded history have there ever been such massive bubbles involving so many people (and countries). Stunning.
About US equity returns. We are now going on more than 9 years without even nominal gains in the US equity markets, In real terms they are down dramatically (probably going back to 1995 or 1996 now, in real terms), whether measured against the CPI basket, the price of gold, or a trade-weighted basket of foreign currencies. That is EXTRAORDINARY, and probably hasn't happened on a rolling 10 year basis since the late 1920s (through late 1930s), and the late 1960s (through late 1960s). This is for an asset class that historically returns 5-7% annual returns above inflation (variously estimated). That is the legacy of a bubble, and I would not be surprised in the least to see ANOTHER 10 years of negative real returns for equities.
Real estate as an asset class demonstrates real returns historically of 0% on average (certain areas like California have done maybe 1-2% real returns, while other regions like Kansas might have been negative 1% real returns) - the value of real estate is in its implied rental yield for the owner. The aftermath of this bubble is likely to be very bad for homeowners holding "for the long term".
Posted by: Satchel at January 31, 2008 1:18 PM
Well, Google missed their earnings (following a day when people started thinking that they would do fine), so the market will sell off, and the fed and the congress will PANIC again. I won't be surprised to see the loan limits raised, maybe not to 725K, but raised.
Posted by: tipster at January 31, 2008 1:57 PM
@tipster -- as you know, google's stock price is my favorite lazy indicator of SF real-estate...
So now we're back to winter 06/early 07 prices -- google 500 ish (but decidedly-negative mo-mo) :)
Posted by: dub dub at January 31, 2008 2:13 PM
Smart money has been short Google for a little while here. Even semi-smart little guys like me! There has never been a top 10 by market cap company in the US that has been able to grow into a 50 p/e (MSFT tried in 1999 and it invited a political "response" from our antitrust friends). (If anyone knows of one, please let me know! Maybe Standard Oil in the early 20th century, but I don't think even that sported the multiple). Now that it has broken convincingly through its 200-day moving average - if you can stand the volatility from the short side (use a trailing stop) - this could be a good ride down to the $200s!! (No recommendation here - consult your broker or trusted adviser, and never trust what some random anonymous blogger on the interent says!)
Posted by: Satchel at January 31, 2008 2:44 PM
From the heart of CA, here's some free advice for the apparently tone-deaf Senate Dems. Unless the Dems are interested in turning areas like CA and NY over to Republicans, they will adjust conforming loan limits to accomodate high-end markets. Baucus may not feel the pressure from Montana's folks, but woe-be-tide any Dem fundraiser if this relief is denied to homeowoners along the coast. Control for quality - it's not brain surgery.
If Schumer would get his head out of his ass for more than one minute, he'd be digging out the footage of Bush guess-timating the cost of his "surge" and compare to real costs as of now. Contrast the additional cost of the Senate stimulus bill with the additional cost of the war over the last year...including a real-time accounting of the fabulously underestimated surge. I continue to be amazed that not one single Dem is using this as an opportunity to provide a graphic about the sheer insanity of the size of "extra funding" demanded by the WH just since the last fictional budget produced by Bush.
The question is simple - do Americans think the $50 billion should go overseas for a "war" virtually no one thinks is worthy, or should the same amount of money be put directly into the US economy. Ask the right question and sweep the election. Continue to ceed the debate grounds and be content with what you get.
AND BAUCUS???? Geez - why not let Tinkerbell have a temper tantrum - that's exactly what this looks like from here.
and please, no one is minding inflation at the top, so why not at least give Americans a paddle to help steer their own sinking ships?
Posted by: Danielle Donovan at January 31, 2008 2:55 PM
people aren't calling this a bailout because it's bailing out San Franciscans.
They're calling it a bailout because it's bailing out the BANKS
The Banks lent horribly the last 5 years, with rediculous standards.
they lent people money they never should have. now, they cannot get those loans off their books, and the loans are going sour at a faster rate than ever before.
Thus, the banks are taking it in the chin (as they should)
What does the government do? It comes up with lots of ways to make it possible for the bad banks to refinance these loans and sell them to Fannie and Freddie
thus, the bad loans go OFF of the banks books, and on to Fannie and Freddie.
Later, Fannie and Freddie will likely fail IF this is allowed to happen. Fannie and Freddie have an implicit governmental guarantee backing them... thus the taxpayers will foot the bill.
THIS is the bailout... taking the losses that SHOULD go to the BAD banks, and instead shifting them to the GSE's.
Posted by: ex SF-er at January 31, 2008 3:14 PM
"it is neither feasible to have all 300M people in the US live in the same place, nor desirable from the federal perspective"
then why subsidize their housing so that all 300M can try to squeeze in the same places (SF, LA, NYC, etc)
instead, don't subsidize housing. This makes it more expensive in the "prime" areas, and can help to disperse the population (as example, back to the midwest and industrial belt)
instead, we come up with ways to make houses "affordable".
what we are really doing is finding more creative ways to help people get more and more and more in debt...
how much subsidy is enough? 5x income? 10x income? 20x income? Generational loans?
Posted by: ex SF-er at January 31, 2008 3:18 PM
I don't think the Senate Republicans are going to let this provision make it into the final bill. It primarily affects only California and New York -- two states that are solidly anti-Republican and which much of the country (at least as represented in Washington) despises. They might allow some added tax breaks for businesses into this package. They might allow some rebate to those with higher incomes that would provide no stimulus to the economy. But they won't give some gift to what is perceived as upper-income Californians and New Yorkers to get a break for their perceived mansions with the taxpayer footing the risk.
What may change things is if the banking lobby (quite powerful) pushes the points ex SF-er has made strongly enough. Bailing out the banks -- Republicans are fine with that. Bailing out Californians and New Yorkers? Never.
Posted by: Trip at January 31, 2008 3:33 PM
Why does housing have to be subsidized at all, especially when all these subsidies seem to do is simply push up the cost of housing making the whole exercise essentially self-defeating? Personally, I would wind down the two FMs role and slowly eliminate the tax deduction for mortgage interest.
Posted by: Amen Corner at January 31, 2008 3:45 PM
"Why does housing have to be subsidized at all, especially when all these subsidies seem to do is simply push up the cost of housing making the whole exercise essentially self-defeating?"
It didn't start out this way (it started out as a panicked response to the deflation of the 1930s), but it has become this: subsidization = higher prices = bigger loans = more $$ for the banks that push the debt. It really is as simple as that. The banks could care less about affordability, and neither do the politicians who get funding from the banks. The Fed goes along with this because it is a private bank, plain and simple.
(On that last point, I know I will get lots of flames about how the board of governors are nominated by member banks and are subject to the political process, blah, blah, blah.... and about how the member banks are not run for profit, blah, blah blah... It's all nonsense. The idea that Washington politicians can go up against the Wall Street elite on matters financial is laughable - like bringing a spitball launcher to a knife fight. Not that Washington has any incentive to regulate money creation anyway. Even if they understood what was going on - very doubtful - the whole arrangement benefits the Washington establishment too much to rock the boat.)
Posted by: Satchel at January 31, 2008 6:49 PM
I am in the anti-subsidy, anti-gov't intervention camp too. Satchel - you have convinced me that the Washington politicos and the Wall Street elite do not have our best interests as a priority. It's rather depressing. What's the solution - Ron Paul for president and Milton Friedman's clone for Fed Chairman?
Posted by: FSBO at January 31, 2008 7:20 PM
milton friedman is dead, which gives him only slightly worse odds to be Fed Chairman than Ron Paul being President.
Posted by: warrenpease at January 31, 2008 8:22 PM
I would prefer to see the conforming limit based on individual income rather than area. No more than 3 times income based on the past 5 years tax returns.
What? What's that you say? Your tax returns aren't an accurate reflection of your real income?
Well then, no free government cheese for YOU. Go get a hard money loan.
Posted by: diemos at February 1, 2008 6:35 AM
Whadayano -- the Senate agreed to increase Freddie and Fannie limits!
I should know better than to underestimate the banking lobby!
Posted by: Trip at February 7, 2008 3:27 PM