Posts Tagged ‘conforming’

Prediction realized

Thursday, January 24th, 2008

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.

I predict…

Saturday, January 19th, 2008

The GSE conforming mortgage limit, which went unchanged for 2008 — and which regulators currently insist is immutable and untouchable — will be raised or eliminated within 90 days.

How could an about-face occur so quickly? Because it is the style of this presidential administration to recognize emergencies late, initially deny their existence, then respond abruptly in a way that (i) benefits wealthy patrons and (ii) has no regard for future consequences.

The White House mortgage bailout plan of December 2007, for example, mainly bails out mortgage servicers, not mortgagees. By incentivizing hapless homeowners to continue paying teaser rates on homes with negative equity, defaults are spread over a longer period, allowing servicers to manage them more profitably. The loser is the mortgagee, who is led to believe he will somehow recover an investment that is already lost, when in fact his most logical action is to default or do a workout with the servicer.

With that in mind, the basis for today’s prediction is that subprime fallout has reached the prosperous (note: the Reuters article referenced here confuses “wealth” with “prosperity,” a common error in America). There was a brief window during 2005-2006 in which a family with an income of, say, $250,000 could “afford” a $2m home with no money down. Their situation is now every bit as untenable as that of a blue-collar family in Cleveland: they cannot qualify for a fixed-rate refi, because their income is too low; they cannot sell, because they have no equity; but they cannot stay where they are, because the payment reset will kill them.

Suddenly, election fundraisers are no doubt hearing, “I can’t donate to your campaign because I can’t afford my mortgage.” This is a problem the currently broken GOP can understand. We should expect White House-controlled regulators to drop everything and look for a quick fix. Allowing Fannie to hold mortgages on homes in Greenwich, Palm Beach and Newport Beach, which would drive fixed rates down on large mortgages, is such a fix.

Should it be done? Probably not. Will it? Yes. There are few other options. You heard it here first.