Prediction realized
Wall Street Journal, January 24, 2007:
“The package is also likely to temporarily raise the conforming loan limits for Fannie Mae and Freddie Mac, beyond the current $417,000, which would allow the government-sponsored companies to buy bigger loans in areas with high housing costs. Rep. Barney Frank, the Massachusetts Democrat who chairs the House Financial Services Committee, said the new limit would be 125% of a metropolitan area’s median housing price, up to a cap of about $700,000.”
Exactly as predicted here five days ago. However, I failed to predict that the desire to subsidize political donors would be bipartisan.
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Tags: conforming, limit, loan, mortgage
January 24th, 2008 at 8:36 am
Brilliant as usual!
January 24th, 2008 at 8:36 am
RE: The GSEs and the law of unintended consequences:
Reuters
Stimulus plan may lead to higher mortgage rates
http://tinyurl.com/2jr98z
"Increasing the eligible loans to $729,750 from $417,000 would change the characteristics of mortgage-backed securities, leading traders to exact a premium for increased interest-rate risk…
"The amount of money that investors are willing to pay for agency mortgages (bonds) could be lower if these loans are TBA deliverable and so mortgage spreads could widen," said Ajay Rajadhyaksha, co-head of U.S. fixed income strategy at Barclays Capital in New York, who will listen to the SIFMA meeting by phone.
Mortgage rates would rise for the "vast majority" of agency-eligible borrowers, he said…"
A bit of analysis can be found at calculated risk:
Traders: Don’t Put Jumbos in my TBAs
http://calculatedrisk.blogspot.com/
"Certainly this problem can be solved by putting the LFKAJ (Loans Formerly Known as Jumbo) in their own pools–as with FHASecure. That might keep this plan from driving up rates for everybody, but it’s not clear to me how it improves the spread on those LFKAJ-only pools. Hmmm."
Anyways, the whole plan is just window dressing, unless they can get the GSEs to start taking low or no doc "liar loans", 100% (or more) loan to value, I/O ARMs with teaser rates, and Option-ARMs /NegAm loans…which our fearless leaders may try to sneak by us as this mess plays out.
– arroyogrande
January 24th, 2008 at 8:36 am
And this as well (From BusinessWeek, "Fannie and Freddie to the Rescue?"):
"OFHEO also will have a say. Director James Lockhart opposes raising their loan caps without additional oversight. "We just don’t think it would be good to divert resources and manpower of these two firms from doing what they do best, which is supporting the conforming loan market," Lockhart told BusinessWeek in a recent interview. "They’ve never bought jumbo loans. They don’t have pricing models, they don’t have risk management models. So it would be a new world."
Duncan estimates it will take Fannie and Freddie at least three to six months to assess the new risk and ramp up their systems to process jumbo mortgages. To offset that risk, Fannie and Freddie will have to charge higher fees for jumbo loans. So the interest rates won’t be much better than today’s pricing, according to Duncan and a separate analysis by OFHEO.
The companies are also hamstrung by a regulatory order that keeps a tight leash on their operations, requires extra capital, and limits their growth. "While Freddie Mac will continue to do what it can to assist borrowers and help restore liquidity to the market, this additional responsibility would create a significant challenge for Freddie Mac as we continue to operate under severe capital constraints," said Freddie Mac spokesperson Sharon McHale. " – arroyogrande