Jumbo mortgages (part of stimulus package)

[Soriak]

Bloomberg.com: Worldwide

The stimulus package passed congress, not surprising... but I'm getting an odd feeling about the cap increase of jumbo mortgages:

Fannie Mae and Freddie Mac, the government-sponsored mortgage finance companies, will be allowed to buy loans worth as much as $729,750 for loans made between July 31, 2007, and Dec. 31, 2008, an increase over the current $417,000 loan limit. The move may help struggling homeowners refinance large mortgages at a lower interest rate. It will also allow the Federal Housing Administration to insure loans as high as $729,750 in expensive markets.

Won't that just prevent the massively inflated prices from correcting? Evidently banks aren't backing this anymore, so it's left to the government to take over.

RGE - Editor's Pick: The Effective Nationalization of the U.S. Mortgage Market in Q3 07

The pace of mortgage production barely slowed right through the credit crisis. But the financing of mortgage production shifted in a dramatic fashion. Private label securitisation imploded, leaving government sponsored enterprises the buyers (or financial intermediaries) of last resort. The mortgage market was effectively nationalised in Q3.

Can someone explain what's happening on that graph? Is the green line privately backed mortgages, the blue one government backed? If so, shouldn't this be the headline on the news right now? I mean, if that comes crashing down, nobody cares about the $160bn stimulus package - that's going to be a loss in the trillion range. I don't know much about real estate, but anytime graphs make such a big correction, I am worried... maybe people are just too busy figuring out how to spend their $600 to notice?

[Cynno]

The change in jumbo loans is saying that you can now use conventional loan pricing on values up to 729,750, which is great for people in areas such as Southern California.

I don't see it effecting the current market crisis at all as the difference in rates was usually around a half a percentage point. Which obviously is a lot of money when considering you pay it over 30 years, but usually wasn't a deal breaker for the people buying the high priced homes.

To reiterate, this will not stop the correction of housing prices.

Also a little bit more information. Loans are no longer just looking at your credit score when deciding to lend to you. They are now taking a more all encompassing look at the borrower as a whole. So, just because your running that 715 credit score, doesn't mean you'll get the loan, but a guy with a great story and a 625, could get the loan.

[Kurk]

Extending the conforming loan limit will allow better interest rates for higher loans. This won't help the crashing housing market. Neither will the stimulus package. The problem is most people simply don't make enough money to afford housing in the bubble areas. They took teaser payments via ARMs and interest only loans. Now those teaser rates have adjusted, housing prices are slumping so they can't refi or HELOC any more money from their house. So basically that leaves them with their paycheck to pay the mortgage. They already effectivly HAD really low rates and still do (rates in the 80s were 14%)...but when the average family income in Los Angeles is ~ $55k and an average home costs $600k the math simply doesn't work in a down market.

Housing needs to correct to the traditional afforabilty ratio of 2.5 to 3 times income. The average starter house needs to return to ~200k in Los Angeles. Banks are losing their shirt on bad bets placed on loans and this will continue for quite a while. They are also tightening their lending practices and trying to hoard cash to write off the bad loans which come back to them in the form of foreclosures.

I predict a nasty recession this year with blood in the streets by this summer. Cash is king and will remain so for the next couple years.