A TALE OF TWO MARKETS DIVIDED BY THE CONFORMING-LOAN LIMIT

 

 

By Lew Sichelman, L.A. Times

 

Roused by a combination of low mortgage rates, sagging prices and government largesse, first-time buyers appear to have entered the housing market with a vengeance. According to the latest statistics from the National Assn. of Realtors, half of existing-home sales were to rookies who had never owned homes before.

But at the top of the housing ladder, the move-up market remains at a virtual standstill, stymied by the inability of sellers to attract buyers who can obtain financing at rates close to what first-timers are paying

Even if the sellers manage to hook a buyer who qualifies for a mortgage under today's super-strict underwriting guidelines, the sellers are probably going to have to invest much of their profit in their next home if they hope to move on.

What we have is a tale of two markets where the dividing line is $417,000, the so-called conforming-loan limit. It's the ceiling on the loans that can be bought by Fannie Mae and Freddie Mac, the two government-sponsored enterprises that buy loans from primary lenders and package them into securities for sale to investors.

Below that amount, Fannie and Freddie provide the grease that keeps money flowing into housing. But above the ceiling, known as the jumbo-loan market, there is no government underpinning in most places.

"If you ever wondered what the mortgage market would look like without government support, that's what we have today in the jumbo market," says Howard Glaser, a Washington, D.C., financial services industry analyst. "And it's not just the high end of the market that's impacted. It affects the market all the way down the ladder, and I'm not sure policymakers in Washington understand that."

Eighteen months ago, housing at all levels had a predictable supply of mortgage money. But when Fannie's and Freddie's accounting problems got the better of them, and most of Wall Street's investment bankers were unable to pay their bills, private investors pulled out of the mortgage market practically overnight.

The U.S. government came to the rescue by placing Fannie and Freddie under the government's wings until the two companies could right themselves and by bailing out the titans of Wall Street. Lawmakers also acted to goose the upper-price brackets by temporarily raising the Fannie-Freddie loan limit to $729,750 in 76 of the nation's 3,300 counties. (The ceiling in high-cost markets is scheduled to fall back to $625,000 on Jan. 1 unless Congress extends it.)

The limit is somewhere between $417,000 and $729,750 in 600 other places. But investors are still so gun-shy that the great majority of Fannie's and Freddie's mortgage-backed securities are now being bought by our own central bank, the Federal Reserve. Worse, in the jumbo sector, there is hardly any securitization at all, and lenders are increasingly reluctant to make jumbo loans they can't sell, at least at rates that borrowers consider acceptable.

"The jumbo market is not functioning," says Lawrence Yun, chief economist at the Realtors group. "We hear from our members every day, 'Fix the jumbo market, fix the jumbo market.' "

Yun says lenders are increasingly reluctant to make jumbo loans even though historically the risk of default is less. The economist also notes the difference between conforming and jumbo loans has jumped from 1.4 percentage points in 2005 to 3.9 points in March.

"Even when people have the capacity to buy, they're not, because they don't want to pay the high jumbo rate," Yun says.

This isn't just about people who are trying to buy and sell homes costing $500,000 or more. It's about the entire housing market, because when current owners can't sell their houses and move up to the next rung on the ownership ladder, those below cannot move up to the next level, either, so the market becomes clogged.

So for the most part, those who don't have a home to sell before they can buy a new one are fueling current sales. In March, according to the Realtors group, 53% of buyers were first-timers. But that figure can be misinterpreted.

"It doesn't mean first-time buyers are rushing to buy," says David Lereah, the Realtors group's former chief economist. "It just means that there are so few trade-up sales that the first-time-buyer share is automatically going to go up."

According to the real estate agents, the national share of sales above $750,000 this year is only about half what it was just two years earlier, dropping from 4.4% in 2007 to 2.3% currently. As a result, the inventory of houses for sale at or above that price point has more than doubled, from almost a 19 months' supply to what Yun calls "a very, very unhealthy" 41 months' supply.

A price-distribution study by the National Assn. of Home Builders shows that although the sale of houses under $250,000 rose significantly last year over 2005, the height of the housing boom, sales of houses costing more than that are down -- from 32.7% in 2005 to 28% in 2008 in the $250,000 to $500,000 bracket, and from 12.4% to 7.9% in the $500,000 to $1 million range.

There are two markets operating now, says Gopal Ahluwalia, the builders group's chief research economist. "In one, mortgage rates are low and prices are down," he says. "But in the other, rates are high and people can't sell at any price."

According to the National Assn. of Realtors, loans above $417,000 account for 10% or more of the market in 11 states and the District of Columbia. In Hawaii, 43% of loans are above $417,000. In California, the jumbo share is 41%. In D.C., it's 30%, and in New York, it's 22%. In 14 states, moreover, 11% or more of the houses are valued at $500,000 or above. And it's not just the usual places like California and New York. The list includes Delaware, Oregon and Illinois.

The jumbo sector is "more widespread than people are aware," Yun says. "It's not just a few coastal markets."

lsichelman@aol.com

 

 

 

FAP (FORECLOSURE ALTERNATIVE PROGRAM)

Good news from Washington, D.C., today. The Obama administration announced new details under its Foreclosure Alternatives Program (FAP) enabling servicers and borrowers to pursue short sales and deeds-in-lieu (DIL) of foreclosure in cases where the borrower is generally eligible for a Making Home Affordable modification but does not qualify or is unable to successfully complete the three month trial period. The program, effective through 2012, requires that prior to proceeding with a foreclosure, servicers must determine if a short sale is appropriate.

 

We’re gratified that the administration has recognized the need to streamline the short sale and deeds-in-lieu processes, and has provided viable options to homeowners who have fallen behind on their mortgages but owe more than their homes would sell for in today’s challenging market. We also appreciate the efforts of our colleagues at NAR for keeping this issue front and center in our nation’s capital.

Incentives in the FAP program include $1,000 for servicers for successful completion of a short sale or deed-in-lieu of foreclosure; $1,500 for borrowers/homeowners to help with relocation expenses; and up to $1,000 toward the cost of paying junior lien holders to release their liens ($1 from the government for every $2 paid by the investors to the second lien holders).

 

The FAP includes streamlined and standardized documents, including a Short Sale Agreement and an Offer Acceptance Letter to minimize complexity and increase use of the short sale option. Servicers will independently establish both property value and minimum acceptable net return, in accordance with investor requirements, based on an appraisal or one or more broker price opinions, issued no more than 120 days before the date of the short sale agreement.
 

In the Short Sale Agreement, servicers must give borrowers/homeowners at least 90 days to market and sell the property, or up to one year, depending on market conditions. The property also must be listed with a licensed real estate professional with experience in the neighborhood, and no foreclosure may take place during the marketing period, of at least 90 days, as specified in the Short Sale Agreement.
  

The Short Sale Agreement also must specify the reasonable and customary real estate commissions and costs that may be deducted from the sales price. The servicer must agree not to negotiate a lower commission after an offer has been received.  Servicers may not charge fees to borrowers/homeowners for participating in the program. Servicers have the option to require the borrower/homeowner to agree to deed the property to the servicer in exchange for a release from the debt if the property does not sell within the time allowed in the Short Sale Agreement, plus any extensions.

 

Additional details will be forthcoming. Please check C.A.R.’s Market Response Center for updated information as it becomes available.

 

Sincerely,

 

James Liptak

2009 President

CALIFORNIA ASSOCIATION OF REALTORS®

 

Employment Report

Reported by the California Association of Realtors

 

Employment Trends Index (ETI)™ increases for first time in 16 Months
The Employment Trends Index (ETI)™ for May now stands at 89.9, a 0.2 percent increase from the revised April figure of 89.7, and a 20 percent decrease compared with a year ago, according to a report released Monday by The Conference Board.

"While it is too early to say that the ETI has bottomed, the moderation of the last two months is certainly a sign that the decline in job losses is real and signals that the worst is over," said Gad Levanon, senior economist at The Conference Board. "However, as the economic recovery over the coming months is likely to be very slow, we still expect the unemployment rate to continue to increase to double digits by the end of this year and into 2010."

 

Mortgage Rates are Going, Going...

By Brett Arends, Wall Street Journal:

June 1, 2009

If you're looking for a new 30-year mortgage, last week's events from the financial markets carry a very simple message: Get 'em cheap while you still can.

Rates on conforming 30-year loans jumped dramatically in just a few days, ending the week at an average of 5.27% according to Bankrate.com. That's still OK by historic standards, but it's a jump from the levels seen just a few weeks ago, when you could get loans at 4.75% or below.

The underlying cause isn't hard to find. Rising government debts, and burgeoning hopes of an economic recovery, are pushing up long-term interest rates on government debt. The yield on the 10-Year Treasury, which was barely 2% near the end of last year, surged to 3.67% late last week before settling back slightly. And that, in turn, pushes up rates on other long-term loans.

What does this mean for you?

This surge in mortgage rates, if it continues, is ominous news all around. It's bad for those trying to refinance an existing mortgage, those looking to buy a new home, and those looking to sell their home. It may also be bad for the stock market, and maybe even for the dollar, too. More on that later.

For those trying to refinance: If you hadn't locked in the rate already, you are probably out of luck. You may be stuck with higher rates.

Ironically, if you were stuck crawling through the refi process when the rates jumped, you may be a victim of new mortgage rules. These were introduced in the last year to prevent another subprime scandal. They have slowed down the loan approval process and have discouraged most lenders from offering rate locks until other steps have been completed. "Lenders are not locking in borrowers' rates until the (home) appraisals are in," says Paul Sapienza, broker at Drew Mortgage in Boston. Until last year you could lock in a rate while you refinanced, or even looked for a new home. "That's over," Mr Sapienza says.

For those looking to buy a new home: Be aware this rate hike -- to 5.25%, from 4.75% recently -- can add quite a bit to your expenses. It will cost an extra $50 a month for someone buying a typical $200,000 residence with an 80% loan.

Rates still look pretty reasonable, but now there's an extra level of uncertainty in the process. Who knows where they will end up by the time you come to sign?

Some borrowers are now looking instead at adjustable rate mortgages, or ARMs. In some cases the initial rates are lower. Alas, we've seen this movie before. ARMs are high-risk and in most cases a terrible idea. They mean the lenders are transferring inflation and interest rate risk to you. In this environment both risks are substantial.

And if you were looking to sell a new home, bad news too: This rate jump adds about 10% to your potential customer's financing costs. Cheap mortgage rates were one of the things tempting buyers into the market. That is now in peril.

Why is this dangerous for the stock market? The rally in recent months depends on the economy stabilizing, and then recovering. There have been some hopeful signs in recent months. But of course the consumer has benefited from at least two big doses of financial adrenaline this winter: Refinancing gains and cheaper fuel. Both put extra money in their pockets. Both now appear to be over.

It is two months since Federal Reserve chairman Ben Bernanke unveiled plans to print money to buy up Treasury bonds. The aim was to keep long-term rates down. He will have to step up the process. The federal government may also wade back into the market for mortgage backed securities with a similar strategy. The U.S. Mint will have to move to a triple shift to print all the money.

Alas, there is only so far this can succeed. Treasury bonds are IOUs of the federal government. But so are dollar bills. Ultimately the bond market may notice that Uncle Sam is only paying off his IOUs with more IOUs. Gamblers who do this tend to find their markers start trading at a discount. When it does, neither is likely to command a premium.