Fannie, Freddie may have to tiptoe into 'jumbo light' market
Monday, February 11, 2008

By Matt Carter
Inman News


While Fannie Mae, Freddie Mac and the Federal Housing Administration will
soon be allowed to dive into what until now has been the jumbo loan market,
it remains to be seen how many borrowers will benefit.

Congress and the Bush administration have agreed to raise the $417,000
conforming loan limit until the end of the year, under a provision of the
$150 billion economic stimulus package approved by Congress last week (see
Inman News story).

But the devil, as they say, will be in the details. The new formula for
determining the conforming loan limit will allow Fannie, Freddie and FHA to
guarantee loans of up to 125 percent of the median home price of an area.

While housing markets where the median home price exceeds $216,840 will
benefit from higher limits for FHA loan guarantee programs, one analysis
suggests Fannie and Freddie will be able to tiptoe into the jumbo loan
business in only 19 metropolitan statistical areas (MSAs).

The first step to be taken to implement the changes will be determining
median home prices. The Department of Housing and Urban Development has been
given 30 days to publish median-home-price data once President Bush signs
the stimulus package into law.

But where will HUD get the data? And with prices falling rapidly in many
markets, will the data be updated monthly, quarterly or annually?

HUD spokesman Lemar Wooley said FHA will use a combination of existing
government data sets and available commercial information to determine the
median sales price. He said FHA loan limits are based on the county a
property is located in, except when the county is part of a larger MSA, in
which case the county with the highest loan limit determines the limit for
the entire MSA.

Not only does HUD have to come up with median-home-price numbers for every
housing market in America, but Fannie Mae and Freddie Mac will have to come
up with credit guidelines for a class of loans that, until now, has mostly
been off-limits. The government-chartered mortgage financiers will have to
decide what their standards will be for the loans they will purchase, or
securitize and guarantee.

As they venture into the jumbo loan market, Fannie and Freddie will have to
decide if they need to be more cautious about the minimum down payments they
will accept, borrower's credit histories, and the fees they charge for
taking on more risk. The task will be complicated by the fact that the
maximum loan size will vary from market to market, instead of the uniform
$417,000 limit in place today in 48 states other than Alaska and Hawaii.

In high-cost markets, the $417,000 conforming loan limit for loans eligible
for purchase or guarantee by Fannie and Freddie will be raised to 125
percent of the median home price, with an upper cap of $729,750. That
formula means that the $417,000 conforming loan limit will remain in place
in markets where the median home price is $333,600 or less.

While there's no time limit for Fannie and Freddie to publish guidelines for
the new class of loans, the companies have promised to work with regulators
to expedite the process. James Lockhart, director of the Office of Federal
Housing Enterprise Oversight, told members of the Senate Banking Committee
Thursday that the process could take months.

The temporary increase in the conforming loan limit is likely to have a
bigger impact on FHA loan guarantee programs, because the current limits for
FHA are lower. In high-cost markets, the current ceiling for FHA loan
programs is $372,790, and $200,160 in other markets.

The new ceiling for FHA loan programs in normal markets will be $271,050 --
meaning that even borrowers in housing markets where the median home price
is below $216,840 may be eligible for FHA-backed purchase or refinance loans
up to that amount. In areas where the median home price is above $216,840,
the limit for FHA loan programs will be 125 percent of the median home
price, all the way up to $729,750.

Fannie and Freddie will be allowed to buy and securitize jumbo loans
originated any time between July 1, 2007 and Dec. 31, 2008. That means jumbo
lenders may be able to sell some of the loans they've made in the last seven
months to Fannie and Freddie, freeing them up to make more loans.

One reason Congress and the Bush administration agreed to raise the
conforming limit, at least for now, is that Wall Street investors will no
longer buy most mortgage-backed securities that don't carry the backing of
Fannie, Freddie or FHA. That means borrowers are paying about 1 percent more
for jumbo loans that exceed the $417,000 conforming loan limit.

But there's no guarantee investors will accept the jumbo loans backed by
Fannie and Freddie -- which are private, publicly traded companies that face
potentially billions of losses in the current mortgage morass -- as safe
investments. They may also need some time to familiarize themselves with how
FHA is handling the larger loans, said Jaret Seiberg, an analyst with
Stanford Group Co. who follows the secondary mortgage market.

"Investors understand the risk characteristics of conforming mortgages that
are securitized by Fannie and Freddie, and they understand FHA-backed loans
securitized through Ginnie Mae," Seiberg said. "But they don't have
experience with jumbo loans coming out of those channels. In a market with
so much uncertainty, it's a real question whether investors are going to
have an appetite for a new product."

If Wall Street investors don't snatch up the larger loans backed by Fannie,
Freddie and FHA after they are securitized, that would limit the benefits to
the secondary mortgage market and do less to ease the credit crunch than
backers of the move have hoped.

As Fannie's and Freddie's losses mount and they bump up against minimum
capital requirements, their capacity to purchase and guarantee loans is not
unlimited. And as Lockhart noted, it takes three times as much capital to
guarantee one $600,000 loan as it does one $200,000 loan.

While Seiberg is confident that HUD can implement higher loan limits for FHA
programs, he said Fannie and Freddie have technological and capital issues
to overcome before they become "meaningful players" in the "jumbo light"
market.

As to which housing markets might benefit from higher conforming loan
limits, Seiberg said Stanford Group used median-home-price data from the
National Association of Realtors to analyze where Fannie and Freddie might
be able to purchase or guarantee loans above the current $417,000 limit.

Stanford Group identified 19 markets -- more than a third of them in
California -- where Fannie and Freddie could enter the jumbo light market.

Estimated conforming loan limit increases

Metropolitan area
 Median price Q3 '07
 Estimated new limit
 
Anaheim-Santa Ana, Calif.
 $700,700
 $729,750
 
L.A.-Long Beach-Santa Ana, Calif.
 $588,400
 $729,750
 
San Diego-Carlsbad-San Marcos, Calif.
 $589,300
 $729,750
 
San Francisco-Oakland-Fremont, Calif.
 $825,400
 $729,750
 
San Jose-Sunnyvale-Santa Clara, Calif.
 $852,500
 $729,750
 
Riverside-San Bernardino-Ontario, Calif.
 $377,000
 $471,250
 
Sacramento-Arden-Arcade-Roseville, Calif.
 $335,700
 $419,625
 
Barnstable Town, Mass.
 $400,600
 $500,750
 
Boston-Cambridge-Quincy, Mass.
 $414,700
 $518,375
 
Boulder, Colo.
 $367,500
 $459,375
 
Bridgeport-Stamford-Norwalk, Conn.
 $491,100
 $613,875
 
Miami-Fort Lauderdale-Miami Beach, Fla.
 $346,800
 $433,500
 
New York-Northern N.J.-Long Island, N.Y./N.J.
 $476,100
 $595,125
 
New York-Wayne-White Plains, N.Y.
 $550,900
 $688,625
 
Edison, N.J.
 $391,800
 $489,750
 
Nassau-Suffolk, N.Y.
 $470,000
 $587,500
 
Newark-Union, N.J./Penn.
 $459,700
 $574,625
 
Seattle-Tacoma-Bellevue, Wash.
 $394,700
 $493,375
 
Wash. D.C.-Arlington-Alexandria, Va./Md./W.V.
 $438,000
 $547,500
 

Source: National Association of Realtors, Stanford Group

***

Send tips or a Letter to the Editor to matt@inman.com, or call (510)
658-9252, ext. 150.

Copyright 2008 Inman News
. 
  Our perspective on

the real estate headlines

From Steve Rodgers, President & CEO,

 Prudential California Realty

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"The goal of owning a home seems to be getting beyond the reach of more and more Americans. The typical new house today costs about $28,000."

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– National Business

Median home price $152,720.

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Median home price $194,382. Defense cuts had triggered steep home price declines.

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– San Francisco Examiner

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The media continues to play up bad economic news, including real problems in the lending marketplace. The truth is, a home remains the most enduring investment most of us will ever make.

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California Existing Single Family Home*

Annual Average Sales Price

1985 $119,860

1995 $178,160

2000 $241,350

2001 $252,350

2002 $391,600

2003 $316,130

2004 $371,520

2005 $450,990

2006 $556,640

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