Friday, January 25, 2008

Increased conforming loan limits not much help for Bay Area homeowners and buyers

If Dubya ultimately signs the proposed economic stimulus package scheduled to be on his desk by mid-February, there could be a noticeable bump in local refinancing activity, but don't expect the changes to help the intended recipients like its authors think.

Basically, "conforming" loans are backed by quasi-government entities Freddie Mac and Fannie Mae and therefore carry lower interests than non-conforming "jumbo" loans due to assumed less risk.

Key highlights of the proposal are:

--Conforming loan limit would be raised from $417k currently to 125% of the local median home price (December Bay Area median is $587,500, therefore 125% of median = $734,375) or a maximum of $729,750. It will likely drop below the maximum by the time this is passed due to a decreasing median trend.

--If passed, the increase currently stands to be only temporary - expiring at the end of 2008. Of course, it could be extended depending on the state of the economy.

--On a typical $700k Bay Area home purchase (20% down) and based on current rates and a 30 year fixed rate mortgage, this change would lower monthly payments by approximately $460 per month. That is substantial.

Problem 1:
What they don't seem to understand is that the people in real trouble cannot qualify to refinance using these conforming loans due to much tighter qualifying restrictions and a maximum 80% loan-to-value ratio (i.e. 20% down payment for purchase or 20% equity for refi). The ones in trouble purchased in the last 12-18 months and put little to zero down to begin with. Even if they put 15-20% down, they defintely have less than that in equity now anyway, so there is no refinance option for them with conforming.

Problem 2:
Of the people who are looking to buy their first home or who have been waiting on the sidelines to get back in the game, most are not looking to, or are unable to, put 20% down. You could argue that point, but it's definitely the minority of the potential buyers out there. And don't forget conforming loans carry much tighter restrictions than non-conforming jumbo loans (i.e. 35% maximum debt-to-income ratio, full documentation of employment and verification of assets). How many of the buyers in recent years could then or can now legitimately meet these terms? Yep, you know the answer - not many!

Now, for people who bought 4 to 5+ years ago and are still in that home likely have 20%+ equity and are good candidates for refinancing if they have not already done so, which many have. I think this is the only significant positive effect that can play out if passed. But again, it doesn't help the troubled recent buyers and those who have already refinanced to the moon.

This thing will have a lot less effect than the geniuses who put it together think it will. And depending on how the markets react and adjust to this over the coming weeks and months, it might not even carry the nice low interest rate spread over jumbos as it does now. Some smart people are already predicting that.


Jason said...

Nice info. Will be interesting to see if and when this gets passed how it will affect the market.

Chris said...

awesome post, just what i was looking for. i'm with ya that this isn't going to bail people out, and for me, to be selfish, that's ok. i'm looking for a bit of a correction here and hope to have that magic 20% to take advantage next year.

if they pass the damn thing. jackasses.