May 11, 2011

Super Conforming Limits In San Francisco Set To Expire September 30

From the New York Times with respect to "super conforming" loan limits, part of an economic stimulus bill first passed in 2008:

For the last three years, federal agencies have backed new mortgages as large as $729,750 in desirable neighborhoods in high-cost states like California, New York, New Jersey, Connecticut and Massachusetts. Without the government covering the risk of default, many lenders would have refused to make the loans. With the economy in free fall, Congress broadened its traditionally generous support of housing to a substantial degree.
But now Democrats and Republicans agree that the taxpayer should no longer be responsible for homes valued well above the national average, and are about to turn a top slice of the housing market into a testing ground for whether the private mortgage market can once again go it alone. The result, analysts say, will be higher-cost loans and fewer potential buyers for more expensive homes.

Without a third extension, "super conforming" loan limits up to $729,750 in San Francisco will expire at the end of September. And while President Obama signed the extension last year, it's unlikely he would do so again even if Congress were to pass a bill.

A Federal Housing Administration spokeswoman declined to comment but pointed to the Obama administration’s position paper on reforming the housing market. "Larger loans for more expensive homes will once again be funded only through the private market," it declares.

Federal Retreat on Bigger Loans Rattles Housing [New York Times]
If Lowering Rates Isn’t Working, Perhaps Increasing Limits Will [SocketSite]
Another Year For Super Conforming Limits (Assuming Obama Signs) [SocketSite]

First Published: May 11, 2011 1:30 PM

Comments from "Plugged In" Readers

It's time the government reduce the risk and protect the tax payers.

I met lot of hypocrites who blame govt for supporting corporations and at the same time supporting tax deductions for their mortgage interest and high confirming limits.

Why should I pay for someone buying a million dollar home?

Posted by: SFwatcher at May 11, 2011 3:04 PM

The problem is that this is going to tank the market further and then you'll be paying for that, SFwatcher.

We basically bail out the bankers no matter what, so one way or the other, we are going to pay for this.

As the market collapses further, you'll pay. Then they'll drop the limit back to $425K and you'll pay when the market tanks further. Then they'll raise interest rates and you'll pay when the market tanks even more. Then they'll eliminate the mortgage deduction and you'll pay when the market tanks again, etc.

Posted by: tipster at May 11, 2011 3:10 PM

That's right. What this country needs is further distress in its coincidentally blue urban centers.

Posted by: BobN at May 11, 2011 3:11 PM

Is there anybody that doesn't think the loss of these loans will have a material impact on the under million dollar market in San Francisco? The jumbo market will come back but rates will be higher and far fewer people will qualify.

Posted by: CH at May 11, 2011 3:29 PM

Can't help but curse my timing. In grad school during the dot com bubble, started my career exactly at the dot com crash, began green card application just before 9/11, finally had downpayment just as housing bubble took prices out of reach.

Saw that housing prices were unsustainable (after reading articles and commentary on sites like this) and figured I just needed to wait it out. Wasn't expecting the amount of government involvement that occurred and the resulting slow-down in inevitable price reduction/flattening.

After all that, I'm now nervous about the impact future government policies (conforming loan designation, mortgage tax deduction, prop 13 discussions) could have on the housing market. All surrounding what would be the biggest investment of my life.

I just wish we would devise the new system, see where all the chips lie and then we can go ahead and make conscious, educated decisions with all the facts. Now, it just seems as though the rules are constantly changing with potentially drastic effects.

Posted by: matlaw at May 11, 2011 3:33 PM

I don't think that anyone can argue that "the private mortgage market can once again go it alone." Of course it can. "Super conforming" loans haven't been around all that long and there have been houses on the market and selling for the aforementioned price range for decades.

The real issues (as mentioned above) are what the interest rate on the higher-cost loans will be, how quickly interest rates rise to that level, and whether that rate has an appreciable dampen effect on the number of potential buyers for these more expensive homes.

Posted by: Brahma (incensed renter) at May 11, 2011 3:35 PM

This isn't going to be market apocalypse. It simply means that those who want to be home-borrowers will have to pay market rates, without the subsidy from me.

If this causes deflation, so be it. We need to start relying upon some real, verifiable notion of value, not just some theoretical bottom beneath which the government will provide price supports.

The extension of this was bad enough. It's unconscionable to extend this again.

Posted by: Embarcadero at May 11, 2011 3:46 PM

Note that Fannie Mae lost $8.7B in three months.

http://www.npr.org/2011/05/06/136066372/fannie-mae-has-loss-seeks-8-5-billion-in-u-s-aid

At that rate they could blow through Mark Zuckerberg's entire fortune in just under 5 months.
Clearly something has to change.

Posted by: tc_sf at May 11, 2011 4:18 PM

It would be great if this is non-renewed, but I don't have enough confidence in our legislators that this won't be renewed when push comes to shove. It has always been bad policy to subsidize home loans at this level, but that hasn't stopped them. We need to move home loans back to the private market, and non-renewing this would be merely a good start.

Posted by: sfrenegade at May 11, 2011 4:21 PM

matlaw - your string of bad timing ended with a stroke of good fate. if you had been successful with a bid during the bubble you probably would have lost much of your down payment. Thank your lucky stars.

Posted by: The Milkshake of Despair at May 11, 2011 5:14 PM

I don't think it will have much of an impact. It means that on expensive homes more of the loan will be a second than right now. When we started house hunting we had two loans that we planned to take to get up to 900k borrowed funds. The first was 729 and the second was the remainder. Now the first will be smaller and the second larger. I don't think availability will change but the number that qualify at each loan amount will decline.

The government has been goosing the housing market for decades by continually delivering advantages to existing homeowners. This boosts the prices. My family had to move and buying was slightly more costly than renting so we bought given our expected years of occupancy. We bought knowing most or all of the artificial price boosters would be withdrawn. I assumed the conforming limit would decline, that our state and federal taxes would increase, that interest rates would increase, that the MID would go away, and that the 500k taxable gains would go away. We'll break even in 15 years instead of having a next egg. The nest egg was entirely captured by the previous owner, to the tune of 1.2 million, of which 500k was tax free. I don't expect to capture anything.

Posted by: djt at May 11, 2011 5:20 PM

"I don't think it will have much of an impact."

Last I checked the government was backing the vast majority of residential lending activity with the private market shying greatly away.

Non-governmental securitization has also been moribund

"Redwood's Sequoia Mortgage Trust securitization platform closed on the 2011 deal in March— a $295 million RMBS transaction. And, in April of last year, Redwood Trust in partnership with CitiMortgage (C: 42.92 -2.90%) closed on a $237 million jumbo RMBS. The 2010 deal was the only RMBS transaction closed in the market that year."

http://www.housingwire.com/2011/05/06/redwood-trust-plans-nearly-1-billion-in-private-rmbs-deals

The $1B in planned securitization is tiny compared to the overall housing market.

Posted by: tc_sf at May 11, 2011 6:07 PM

i don't get why conforming limits are national in the first place.

rates and limits should be tied closer to a local market's median home price and median household income.

i have more of a problem with "taxpayer dollars" supporting macmansions in the south or heartland then supporting truly middle class homes anywhere.

there's a big difference between the government backing a $729 loan in the bay area, or boston, or nyc...and backing a loan for the same amount in most of the central states and cities.

like the hgtv show or the NYT column "what you get for your money", my "million dollar home" in san francisco would cost 1/2 that in the wealthier suburbs of new jersey and only 30% in the st louis or nashville MSA.

expect the conforming and jumbo gap to widen even further then previous average historical .5%.

Posted by: modernedwardian at May 11, 2011 8:26 PM

Lol. Conforming loans should be 3x income as verified by the last 5 years of tax returns and 20% down regardless of where the house is.

Posted by: diemos at May 11, 2011 8:46 PM

I wonder if this possibility could goose up market activity over the next several months (like we saw last year with expiring government credits). Buy/Sell now or be priced out (by exploding interest rates) forever?

Posted by: sanfrantim at May 11, 2011 9:23 PM

Interest rates won't rise much for most people. As djt notes, you can still borrow most of it as an agency loan and get a second loan for a higher rate.

But far fewer people will qualify for the second loan than would have qualified for an agency guaranteed loan. If you pull out half the buyers, prices fall. And that's whats about to happen.

It's a narrow segment of the market, but every segment above it will fall too, because otherwise, people just above that segment would trade down.

And that's why the NAR is going to try, unsuccessfully I might add, to fight this. So it clearly IS going to make a difference or they wouldn't be fighting it.

And what the hell is this country coming to when someone with a low credit score and little down payment savings can't buy an $850K+ home? Because today then can. It seems ridiculous that someone who had trouble paying their phone bill will not be handed nearly three quarters of a million dollars by the government, when falling prices are all but assured, for the same reason they fell in Japan. But after September, someone who couldn't pay their phone bill will have to settle for a little over half a million dollars. Seems unfair. Sarcasm off.

Posted by: tipster at May 11, 2011 10:08 PM

Tipster, the government doesn't provide the money for these loans. They guarantee VA and insure FHA loans, but the money for those loans comes from investors who buy Ginnie Mae securities. Fannie Mae and Freddie Mac issue mortgage securities that fund pools of loans, but private mortgage insurance companies take some of the risk if the loan has an LTV over 80%. If the loans are properly underwritten, then the risk should be mitigated. It worked fine for decades, until Wall Street blew out the model by making unlimited loans to anyone who could breathe. Their actions caused the bubble and the subsequent collapse of the market and housing prices. Fannie Mae and Freddie Mac were not perfect, but it was Wall Street who messed it up for everyone.

Posted by: Money Man at May 11, 2011 11:26 PM

there's a big difference between the government backing a $729 loan in the bay area, or boston, or nyc...and backing a loan for the same amount in most of the central states and cities.

the problem is that the loss severities are too high on the super conforming loans (in real dollars).

ONE $700k house that loses 50% = $350k loss to the lender which is guaranteed by Fannie/Freddie (in other words, by taxpayers). That is the same as TWO $350k houses that lose 50%, or SEVEN $100k houses.

in addition: a lot of the worst hit markets are the most expensive markets, in part because the people in the more expensive markets are WAY over-leveraged.

many of the high COL areas (california, NY, DC, Seattle, Portland, etc etc etc) saw people with housing debt 5-10 times annual income. In the "flyover" states (excluding rust belt which is falling apart) that ratio is often 3-5 times annual income.

I hear it on Socketsite all the time. People claiming that a family making $200k/year can/should buy a home for $1M. that, my friends is over-leveraged.

the cheaper markets have lower leverage. That $200k/year person might buy a home for $500-600k as example.

high priced mortgage plus high leverage = increased loss severities.

Fannie/Freddie are already bankrupt and the losses are rolling in.

Besides, their job is done. Their job was to transfer all the dreck possible from the private hands (BofA, Wells, JPMorgan, etc) into Fannie Freddie, and much of what could be transferred has been transferred. Now they will be allowed to fail. And then the Private marketeers will say "You see! This is what happens when Government runs housing!" (of course forgetting that all the big 7 were and are insolvent due to their lending).

====
all that said, count me among the supporters of this move. There is no reason that people making hundreds of thousands of dollars a year need federally subsidized mortgages. and as I've said for years, there will ALWAYS be mortgages available for the high cost homes.... it'll just be at a market determined interest rate. (probably much much higher than 5%).

I myself would offer a loan up to $1.5M at 10-12% depending on your income/assets and market. I'm sure others would offer lower rates. who knows? 8%? 10%? maybe even someone insane will offer 6-7%!!

Posted by: ex SF-er at May 12, 2011 5:26 AM

Never fear, NAR is busily at work in Washington making sure that your super-duper conforming loans are right around the corner.

Posted by: diemos at May 12, 2011 6:58 AM

"rates and limits should be tied closer to a local market's median home price and median household income."

While the general $417k limit is national for the contiguous US the "super-conforming" limit does vary by geography and local median. The $729k is just a upper bound regardless of local median price.
You can look up individual regions here:
http://www.fanniemae.com/aboutfm/loanlimits.jhtml

"expect the conforming and jumbo gap to widen even further then previous average historical .5%"

I agree with this. It just doesn't seem very profitable to be lending near current agency rates given the loss, recovery and inflation rates being seen now. Especially for second mortgages in states where recourse is difficult. And with securitization dead it makes it more difficult to spread the risk

"Tipster, the government doesn't provide the money for these loans. They guarantee VA and insure FHA loans, but the money for those loans comes from investors who buy Ginnie Mae securities. "

But ultimately the taxpayer is on the hook when the loans go bad. Note that from the NPR article above the Fannie/Freddie bailout cost is now up to $259B. To compare this amount with losses caused by actual Wall Street crooks the recently convicted Raj Rajaratnam was estimated to have made $20M in illegitimate profits. Even Bernie Madoff caused investor losses of $18B, about 1/14th those of Fannie/Freddie.

"I myself would offer a loan up to $1.5M at 10-12% depending on your income/assets"

A consequence of non-recorse statutes combined with an increases willingness of borrowers to strategically default is that income and assets don't protect the lender as much as you'd expect.

Posted by: tc_sf at May 12, 2011 7:44 AM

Moneyman, as others have correctly noted, the government DOES give the buyer the money. That's been the whole point of this all along. The buyer then uses that money to pay the seller who gives it to the banker/investor who loses less than if the government had not sourced the funds.

There are middlemen to mask the transction, but you need to start seeing through the sham portion of the transaction and focus on the reality. This is a way for taxpayers to hand money to bankers, pension funds and foreign investors.

Obama said he was going to spread the wealth. You just didn't realize that he was going to spread it FROM the middle class TO rich people!

Posted by: tipster at May 12, 2011 8:36 AM

Ultimately I think we need to get rid of 30 year fixed mortgages. When interest rates are low they don't make sense for the banks which is why they want to pass them on to the GSE's or sell them to wall street (who wants to lock themselves into a low yielding investment for 30 years?) and at higher interest rates they don't make sense either (who wants to pay such a high rate and the banks know that if rates fall the mortage will be refi'd at a lower rate so they aren't even gonna get that high interest rate for the whole 30 years).

Posted by: Rillion at May 12, 2011 10:27 AM

A consequence of non-recorse statutes combined with an increases willingness of borrowers to strategically default is that income and assets don't protect the lender as much as you'd expect.

I know. My real point was really that if the govt pulls out of super-conforming mortgages there WILL still be a RE market and there WILL still be loans offered to select people.

Proper due diligence can help one select borrowers who are less likely to default. once done, there is a level at which it can "make sense" to offer a loan. I was throwing out a number, but I'd bet that many private hands could and would fund higher cost mortgages at rates of 10-12% as example.

There will still be intermittent losses, but if due dilly is done well then those losses could (and should) be offset by profits on your performing assets.

in other words, you really recoup your investment on the front end, BEFORE you even give out the loan, as opposed to waiting until it goes into delinquency.

This is what went wrong in the 2000's. Everybody threw due diligence out the window because it wasn't SHORT TERM profitable. the name of the game was make a mortgage, take the fees, and dump the crap on somebody else. by the time the mortgage blows up? IBGYBG. (I'll Be Gone, You'll Be Gone).

thus, people were being approved without any diligence at all. NPLs unsurprisingly skyrocketed leaving the losses, which were borne by the Govt and by the Taxpayers.

Currently, mortgage interest rates are distorted (lower) due to Govt intervention. Fannie/Freddie/FHA insurance, outright subsidiation due to Ginne, Fed purchases of Treasuries and MBS, etc.

As this goes away, equilibrium will be found again, albeit almost assuredly at mortgage interest rates far higher than they are today, and with reduced credit availability to regular joes and janes.

Posted by: ex SF-er at May 12, 2011 10:32 AM

@ex-SF -- I agree with your points about the private market coming into play albeit at higher rates. But I believe that due to trends where better borrowers are increasingly prone to strategic default, lower LTV's will be required as well since that better protects a lender from a strategic default.

"Ultimately I think we need to get rid of 30 year fixed mortgages."
Particularly since an originator can take active measure to reduce credit risk by making better loans, but what can they do about rate risk other then sell it off to Wall Street?

Posted by: tc_sf at May 12, 2011 11:03 AM

"Ultimately I think we need to get rid of 30 year fixed mortgages."

What forces banks to offer 30 year fixed mortgages other than Fannie/Freddie? If we reduce their size, we reduce a large portion of the problem. There could still be a market for the type of bond that's sold even without them -- it would just be a higher rate bond due to the higher risk.

There is nothing inherently wrong with securitization. It's just that it causes problems when done poorly, as was done during the boom.

Alternatively, we could make the process better by cutting out some of the rent-seeking by banksters. Rather than make the prime goal of securitization to extract fees, you could make it more about actually facilitating financial markets. I think I've also mentioned Denmark's residential real estate financing market before, which is more directly tied to the secondary market. You can accept a higher interest rate and lower your principal amount. I provided this link once before:

http://finance.yahoo.com/family-home/article/109430/the-housing-finance-system-needs-a-redesign;

What we could use is real innovation in real estate finance, not rent-seeking masquerading as innovation.

Posted by: sfrenegade at May 12, 2011 11:27 AM

lower LTV's will be required

I agree. This is part of the due diligence discussed above (lower LTV ratios also lower the DTI ratios I brought up above).

Particularly since an originator can take active measure to reduce credit risk by making better loans, but what can they do about rate risk other then sell it off to Wall Street?

off the top of my head, they can do at least two things
1) they can increase the premium for mortgage rates on 30 year vs 20, 15, or 10 year mortgages.

although payoff rates will be higher with a 30 vs 10 year fixed mortgage, a lender also will make more on the front end with a 30 year if let's say a 10 year fixed was X% and a 30 year fixed was X+Y%.
some borrowers would rather have a 30 yr fixed at X+Y% compared to a 30 year ARM with initial rate of X% or a 10 year fixed at X%.

2) they could add early payoff fees to the mortgage. I have no idea if early termination/payoff fees are illegal for mortgages. if they are, the Banking industry could fight to turn those over. sort of like my Sprint bill...

although 30 year loans are tricky, they are not impossible. Especially if the banks duration match their assets and liabilities (which they dislike doing). it is not a problem if the bank matches durations (which again, they hate doing). for instance, if the banks held 30 year Treasuries on their books for every 30 year mortgage... Instant Profit! Impossible to lose money if the Premium of mortgage over Treasury is set correctly.

although 30 year mortgages come with interest rate risk (such as change in rates causing borrowers to refinance), one must also look at the fact that there are lower default rates on 30 year fixed compared to ARMs and Option adjustables. Thus, a 30 year mortgage reduces credit risk.

But in the end: Banks hate duration matching because they can't leverage up 30:1 and give hundreds of millions of bonuses to the CEO.

Thus, OUT goes sensible lending (and rich CEO's) and IN comes outrageous lending (and unimaginably obscenely rich CEOs).

Posted by: ex SF-er at May 12, 2011 12:12 PM

FHA loans are a non-issue for me in both my personal residence and where I invest in SF (+$1.5M properties) and I think for many other San Franciscans. I agree that 30 year mortgages don't make much sense in most cases. My own $1.3M home loan is a 15 year variable that resets monthly and is based on Monthly LIBOR plus 2.5%. Guess what the fully indexed rate is this month, 2.5%, with payment of about $3k. I'm paying $5k/month "all in" for a place that would easily rent for $8k/month. These type of loans are quite available in SF from both First Republic and Bank of Marin. Yes, you will likely have to put down 25%, but many people do that are buying $1.5M+ properties anyway.

I see no problem with the government subsidizing home loans as they subsidize almost everything else in our economy today. If the argument is get government out of the biz of subsidies then I am all for it, but never going to happen as this is how votes are bought.

Posted by: Skirunman at May 12, 2011 12:26 PM

Yeah, I don't think it will have all that much affect on either the high or low end of real estate, I think it will have a fairly noticeable affect at and around the cusp of the change so the $600K-$800K are likely to feel it the most, and the farther away you are in price, the less of an impact there will be.

I'm for the change, as I think government subsidies are, in most, cases more harmful than helpful.

Posted by: lyqwyd at May 12, 2011 12:59 PM

2) they could add early payoff fees to the mortgage. I have no idea if early termination/payoff fees are illegal for mortgages. if they are, the Banking industry could fight to turn those over.
I'm not a licensed mortgage broker, but I happen to know that mortgage prepayment penalties aren't illegal and in fact were quite common during the credit bubble; this is the secondary, but still quite lucrative, mechanism that certain smaller lenders and loan servicers used to extract wealth from so-called "subprime borrowers" who were refinancing every couple of years during the bubble due to home value appreciation (however artificial it was) or prevailing interest rate reductions.

Posted by: Brahma (incensed renter) at May 12, 2011 1:01 PM

The housing market experienced a small decline based on removal of demand from the market. However, it remains subsidized by the federal government and current pricing reflects that. They have not withdrawn that subsidization as the economy was too delicate to take the full impact. We will continue to experience declines in the mean value of homes. This change will affect top end of the market, but it will trickle down as they lower limits, and raise interest rates.

I recently tried to purchase a home in NYC. Prices here have not adjusted much - but there is almost nothing for sale in certain areas. While it's a high demand area, it's not immune. This leads me to belive owners are sellers sitting on losses that refuse to tell. I expect that to continue, as prices decline over the next 3-4 years.

Posted by: Firestyle at May 12, 2011 1:34 PM

"I think I've also mentioned Denmark's residential real estate financing market before, which is more directly tied to the secondary market."

I like the Danish system, but given the level of financial savvy exhibited by the general public I have to wonder how effective it would be in the US.

"1) they can increase the premium for mortgage rates on 30 year vs 20, 15, or 10 year mortgages."

Increasing the premium allows you to charge more for the risk, but not to control it.

Note also that being long Treasuries and a mortgage doubles your rate risk rather then hedging it. In both cases you are lending out money in return for nominal interest payments which become less valuable in real terms if prevailing rates increase.

Regardless of the mechanics though, the rate risk can either be held by the originating bank, sold to a private party or sold/assumed by the government. If the government assumes the risk then they have an incentive to keep inflation low and some ability to influence monetary policy to control this risk.

This actually encourages "Too Big To Fail" since large banks can achieve some success in influencing government policy to control this risk, but "Too Small To Care About" banks cannot.

Prepayment fees can provide a minimum upside for rate risk but do nothing to cap the downside since people have little incentive to prepay loans with negative real interest rates.

"FHA loans are a non-issue for me in "
The loan limits will also apply to Fannie/Freddy . The current Fannie/Freddie/FHA market share is very high nationally. And I believe that for SF the FHA market share is non-trivial.

" but never going to happen as this is how votes are bought."
There is some interesting dynamic with the super-conforming limits since all of congress must vote for them, but they don't benefit every district.

Posted by: tc_sf at May 12, 2011 1:39 PM

I'm not a licensed mortgage broker, but I happen to know that mortgage prepayment penalties aren't illegal and in fact were quite common during the credit bubble

Yes, that's true. However, I believe the Garn Act doesn't allow a prepayment penalty if the lender is also exercising a due-on-sale clause.


I like the Danish system, but given the level of financial savvy exhibited by the general public I have to wonder how effective it would be in the US.

Perhaps, but paternalism shouldn't necessarily be the rationale against adopting a better system.

Posted by: sfrenegade at May 12, 2011 2:17 PM

Increasing the premium allows you to charge more for the risk, but not to control it.

of course. after doing good due dilly, one can basically NEVER "control" risk.
but if you charge enough for the risk then you compensate yourself for the... ahem... risk! :)
isn't that what capitalism is all about? trying to be adequately compensated for the risk one is taking?

Note also that being long Treasuries and a mortgage doubles your rate risk rather then hedging it.

thanks for catching that. major brain fart. You are totally correct.

Before I had my aneurysm I was thinking of saying:
for instance, if the banks held 30 year certificates of deposit or similar on their books for every 30 year mortgage... Instant Profit! Impossible to lose money if the Premium of mortgage over CD is set correctly.

sorry for mispeaking.
The bank must simply match asset and liability duration to 30 years...
instead of using short term and/or leveraged "hot money" to fund long term fixed mortgages, which is what they do instead.

the banks wail and gnash teeth and say "waaah... that is impossible".

You know what, they make 50 bajillion dollars a year. They made up all sorts of terrible "innovations". I'm sure they can come up with some form of duration-matched fixed mortgage for a price.

Posted by: ex SF-er at May 12, 2011 3:46 PM

I think the issue is that there is a bit of an adverse selection process when one party bears the brunt of the risk and another has a hand in the outcome. Contrasted with a risk which is random or at least uncorrelated with who bears it.

A similar issue occurs with rent control, where in theory a landlord could charge an adequate risk premium during vacancy decontrol to compensate for the risk of an extended tenancy. But the higher the premium the more it dissuades prospective short term tenants while still being attractive to prospective long term tenants.

"or instance, if the banks held 30 year certificates of deposit or similar "

But who wants to lock their money up in a CD for 30 years? And to the extent that individuals buy these CD's then they are assuming the rate risk whereas the whole point in encouraging fixed rate mortgages is to shield individuals from taking rate risk.

Posted by: tc_sf at May 12, 2011 4:48 PM

Regardless of the mechanics though, the rate risk can either be held by the originating bank, sold to a private party or sold/assumed by the government. If the government assumes the risk then they have an incentive to keep inflation low and some ability to influence monetary policy to control this risk.

I appreciate the rest of your comment tc_sf, but the above statement puts theory above practice. In theory, one would think the government would represent the people and would be proper financial custodians of the people's financial affairs--that they would have fiduciary duties on behalf of the people. Therefore, the government would act as you predict in theory.

But in practice, they are wanker banker whores. The politicians and central bankers will set whatever interest rates help their masters.

But that was good speculation on the rationale for why Congress is willing to drop the limits; that only a few Democratic districts appear to be effected. I was originally surprised to hear the politicians were going to lower the limits, because I assumed their masters would have wanted greater government support so as to not let the bubble deflate too quickly. Heck, they are extending loans to 40 years and kicking the can down the road (and thus condemning a good number of people to a decade-plus term of debt slavery), and they need all the help they can get from the government. Or so I thought. . .

I guess the banking elite already dumped their losses on society, so they don't mind letting the bubble pop a little bit more in some areas--like San Francisco.

Posted by: SFHawkguy at May 13, 2011 9:27 AM

A similar issue occurs with rent control, where in theory a landlord could charge an adequate risk premium during vacancy decontrol to compensate for the risk of an extended tenancy. But the higher the premium the more it dissuades prospective short term tenants while still being attractive to prospective long term tenants.

This argument also puts theory over practice. Is there really much of a risk premium? First of all, not all units in SF are effected by rent control. Probably not even most. And in the recent environment I can't imagine how rent control can be one of the top issues for a landlord. Prices went down for a while and have only risen modestly over ten years. I can see how rent control may have effected some landlords negatively through the rapid increase in the late 90s when some renters were renting from the early 90s or even 80s. But how many of them are still around and renting the same units?

The current medium to long term renters (say 5-10 years in one place) probably don't have the sweet deals that you think. Plus, most people move into another place and do not rent for decades. I personally only know of a few people that have rented for over a decade in one place and in many cases landlords are more than happy to accept a steady rent rather than try to chase a higher rent with someone that is going to move along quickly.

Posted by: SFHawkguy at May 13, 2011 9:37 AM

The higher the premium the more it dissuades prospective short term tenants while still being attractive to prospective long term tenants.


How? Just the opposite is true.

The cheaper the rent, the more apt you are to attract lifetime tenants. A life estate in your real estate in exchange for the price of 1984 Jetta.

If you have a tenant in a rent controlled apartment after 5 years, any de-controlled rent upticks are wiped out and you are once again are subsidizing the rent.

Most rent controlled landlords wants tenants who will move in 2-4 years. The higher the rent, = better condition of the apartment, the more likely you are to get a tenant that is former owner, ready to own again, or folks in the start of a professional career, who will outgrow due to family, job relocation, or purchase. It also means every few years you get to renew the property , which then attract even higher rents, which attracts again better tenants, your property stays in better condition, which increases it value.

Most landlords call tenants who stay more than 5 years barnacles. They want them scraped away, as they erode income. The annual allowable rent increase is set as less than CPI, so long term tenants erode returns.

Take a look at rentals in any neighborhood on VRBO. A lot of folks a turn rentals into hotel alternative housing to avoid the rent control issue all together, by keeping stays under 30 days.

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Posted by: kathleen at May 13, 2011 10:16 AM

@SFHawkguy -
"In theory, one would think the government would represent the people and would be proper financial custodians of the people's financial affairs--that they would have fiduciary duties on behalf of the people. Therefore, the government would act as you predict in theory."

My main point was not regarding people's motives, rather that there is a difference between risk which is uncontrolled by any actor, such as risk of a tornado striking, and "risk" which is actually a decision controlled all or in part by an interested party.

As you point out, a party who has control of such a "risk" could choose to act altruistically or for it's particular benefit. As to this factor, I am more or less on the same page as you. I was not intending to imply that government would act altruistically, rather that it would be influenced by its own interests (reducing the real burden of nominal debts, Inflation adjusted bond payments, inflation indexed benefit payments, fear of adverse bond market action,...) and be lobbied by others (big banks) about their interests.

My point regarding smaller bank's weaker ability to influence government was that this disadvantages them in contrast to large banks which can and do lobby aggressively for their interests.

"This argument also puts theory over practice. Is there really much of a risk premium? First of all, not all units in SF are effected by rent control. "

Obviously any premium would apply only to those units under RC.

"And in the recent environment I can't imagine how rent control can be one of the top issues for a landlord."

There's a difference between the backwards looking result of recent years and a forward looking premium. If I want the option to purchase google stock for $550 over the next two years it may or may not end up making me money two years from now, but right now no one would sell me that option for free.

Or consider that you have the opportunity to buy two identical units as investments, one with RC, one without. At the same price, no one would pick the RC'ed unit. How much would the price of the RC'ed unit have to be lowered before you'd be ambivalent about the choice?

@ kathleen --
"How? Just the opposite is true.

The cheaper the rent, the more apt you are to attract lifetime tenants. A life estate in your real estate in exchange for the price of 1984 Jetta."

I agree that landlords can and do market and position their units to avoid long term tenancy.

But consider two identical apartments, one with RC and one without. At the same rental price, all tenants would pick the RC one because that provides them with a price cap. If you knew you were only going to stay one year you'd be unwilling to pay any premium to get the RC unit since you would never benefit from this price cap. If you planned for this to be a unit that you would be in for life then you'd pay a decent premium for the RC unit, since it seems almost inevitable that rent will rise over the next few decades.

So while in theory, a landlord could get statistics on average tenancy length and charge some premium to compensate themselves for the RC risk, the problem is that the higher the premium the more it dissuades short term tenancy.

If tenants had to roll dice each year to determine if they moved or stayed in such a way that the average tenancy would be the same as it is today, then this problem would not exist since there would be no hidden information in the tenants mind as to how long they planned to stay.

Posted by: tc_sf at May 16, 2011 10:40 AM

Well export the jobs overseas. Let the property prices tank. No Social security.. very soon we will be looking to get visas to work in India and China. Hope they have a good Social Security system like we have had for immigrants for all these years

Posted by: Paul at August 24, 2011 6:07 PM

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