By Carolyn Said, San Francisco Chronicle
Buying or refinancing a house in the pricey Bay Area?
You could get a big break on your mortgage from the economic stimulus package announced Thursday.
Besides its core purpose of providing tax refunds, the tentative package – which still has several hurdles to clear – essentially rewrites the definition of “jumbo” loan, raising the cap from its current $417,000 to as high as $729,750 in high-cost areas for one year.
That would mean home buyers who need the high-ticket mortgages this area requires could qualify for the benefits now limited to non-jumbo, or conforming, loans: an interest rate that’s roughly a full percentage point lower.
On a $650,000, 30-year fixed-rate mortgage, the savings could be $417 a month, according to California Sen. Barbara Boxer’s office.
“This is exactly what we need for California,” said David Crane, Gov. Arnold Schwarzenegger’s adviser on jobs and economic growth, reacting to news that the White House and bipartisan Congressional leadership had agreed to raise the loan cap.
“There is no issue of greater importance to the California economy than the availability of (housing) credit,” Crane said. “When people can’t get credit, housing prices decline, you can’t get new buyers in, and people can’t refinance existing, expensive, subprime or other loans. This is critical.”
The proposal would allow Fannie Mae and Freddie Mac to buy loans up to 125 percent of an area’s median home value – up to $729,750 – well above their current $417,000 limit. While the new limit would vary based upon how expensive an area is, almost all of the Bay Area would automatically merit the $729,750 cap by virtue of having medians above $600,000.
Fannie and Freddie are government-sponsored entities that inject liquidity into the mortgage market by purchasing loans and then either keeping them or packaging them into securities sold to investors – with a guarantee in case they default.
Ever since the credit crunch hit last summer, banks have been skittish about writing mortgages that don’t qualify for Fannie/Freddie backing. That’s why jumbos got so expensive relative to conforming loans, and jumbo borrowers needed to have good income, a big down payment and a stellar credit score.
The jumbo tightening had a huge fallout in California, especially in expensive places such as the Bay Area. It’s a one of the main reasons home sales plummeted last fall. Almost two-thirds of Bay Area homes were bought with jumbos from last January through July, according to DataQuick Information Systems. But by November that had fallen to 43.4 percent, and in December it was 39.6 percent.
The state’s median housing price is $402,000, far above the nation’s $220,000 median. And the going rate in the Bay Area is even higher. In December, the region’s median sales price for an existing single-family home was $620,000, according to DataQuick. California finance and real estate professionals have long chafed under the Fannie/Freddie limits, saying it’s unfair to impose the same cap on, say, Marin County, where the median is $835,000, as on Akron, Ohio, where it’s $125,000.
“This will really open up the market,” said Richard Redmond, a broker associate at All California Mortgage in Larkspur. “It is fabulous news for the Bay Area and for first-time home buyers.”
John Lonski, chief economist at Moody’s Investors Service in New York, said lifting the cap could happen just in time.
“This remedy could prove quite valuable at supplying a badly needed boost to this spring’s peak selling season for housing,” he said. “If home sales can’t stabilize in the second quarter, then the U.S. economy is in more trouble than we currently realize.”
While the higher cap would benefit buyers and refinancing homeowners with decent financial profiles, it might not help a significant number of troubled homeowners, experts said. That’s because many people who live where home prices are sinking are underwater – they owe more than their homes are worth – which disqualifies them from Fannie/Freddie-backed mortgages. Moreover, some people with subprime loans might be too shaky financially to qualify.
“This won’t do anything for people who bought houses in 2005 and 2006 with subprime loans who have little or no equity,” said Jack Guttentag, emeritus professor of finance at the Wharton School at the University of Pennsylvania, who maintains the MTGprofessor.com Web site. “If they can’t afford the reset rate (for adjustable loans), their only hope is to get a modification from their lender.”
Struggling homeowners might get a boost from another element of the stimulus package, which would raise the loan cap for Federal Housing Administration mortgages to the same $729,750 in high-cost areas from its current $362,000. That might allow more people to refinance into FHA loans, which are available to buyers with down payments as low as 3 percent, and also would offer options for people with blemished credit.
The proposed new loan cap drew some criticism as allowing Fannie/Freddie to take on too much risk and to stray too far afield from their mission of expanding affordable housing.
“I’m concerned,” said Dean Baker, co-director of the Center for Economic and Policy Research in Washington, D.C. “It raises the possibility that Fannie and Freddie will just be buying up a lot of bad mortgages.”
Or rather, mortgages that could turn bad. Criteria vary, but most loans that the duo purchase have at least a 5 percent down payment. In a depreciating market, it’s easy for that equity to get wiped out if prices fall – and for homeowners to then go into foreclosure, Baker said. “If you owe $600,000 on a home that’s worth $500,000 or even $550,000, there is going to be a very strong temptation to walk away,” he said.
Although Fannie and Freddie are independent, publicly traded companies, there is universal belief that the U.S. government would ride to their rescue if need be.
“If they end up buying up bad loans or getting themselves in trouble so that their own survival is in question, the federal government will bail them out, I don’t doubt it,” Baker said.
Supporters of the cap hike say that the housing market is in such crisis that a quick infusion of capital is the best way to prevent foreclosures from spreading even more.
Now that the Bush administration and House leaders from both parties have agreed on the stimulus package, it will go to the full House and then to the Senate. Underscoring how urgently Congress views the economic situation, legislators plan to fast-track the bill so it reaches Bush by mid-February.
Boxer has already written to congressional leaders urging that the higher cap be enacted.
“This opportunity to raise the loan limits comes at a crucial time for many families in California, which is currently experiencing one of the highest rates of home foreclosures in the country,” she wrote Thursday. “Taking this action now would help those who want to affordably refinance their mortgages and save their homes. The security and affordability provided by Fannie Mae and Freddie Mac should not be limited only to those areas of the U.S. with lower housing prices.”
How stimulus package will work
What: The tentative economic stimulus package would raise the limits on mortgage loans Fannie Mae and Freddie Mac can acquire. For one year, the limit would be 125 percent of an area’s median cost, up to $729,750, a big jump from the current $417,000.* Likewise, the package would raise the limits for Federal Housing Administration loans up to $729,750 in high-cost areas, up from the current $362,000.
Why it matters: Mortgages backed by Fannie and Freddie carry an interest rate a full percentage point or more lower than “jumbo” loans.
Local impact: The Bay Area median home price stood at $620,000 in December. If the loan cap is raised, many more homeowners and home purchasers here would qualify for “conforming” loans at lower interest rates.
Examples: For a 30-year fixed mortgage of $550,000, the monthly savings would be $353, Sen. Barbara Boxer’s office said. For a 30-year fixed mortgage of $650,000, the savings would be $417 a month.
What’s next: The package has to pass the House, which seems likely, and then go to the Senate. Congress aims to get a bill to President Bush by mid-February. Experts said if the loan cap is raised, the new limit would be reflected in mortgage offerings almost immediately.