A FHA loan requirement that the sum of all liens not exceed the maximum geographical loan limit has been eliminated, according to a Mortgagee Letter from HUD.
Previously, the sum of all liens (first and second mortgages) could not exceed the geographical maximum mortgage limit for both purchase and refinance transactions.
In other words, even if the first mortgage was below the maximum loan limit, an associated second mortgage could push it beyond the limit and disqualify the loan from FHA financing.
For example, in Los Angeles county the maximum loan amount for a FHA loan is $729,750, meaning a loan of that size wouldn’t qualify for FHA financing if it had a second mortgage behind it.
Going forward, only the FHA-insured first lien is subject to this maximum loan limit.
However, FHA still requires that the combined loan amount of the FHA-insured first mortgage and any subordinate lien(s) not exceed the applicable FHA loan-to-value (LTV) ratio, which is generally 96.5 percent.
Fannie Mae and Freddie Mac are broke. The two government-sponsored enterprises (GSEs) that togetherfinance more than $5 trillion in mortgages are insolvent, if you don’t count the $150 billion already injected into them by the federal government. The common shares of these state-corporate hybrids have lost more than 99 percent of their value, both have been delisted from the New York Stock Exchange, and since September 2008 they have been official wards of the state. The largest owner of their obligations is now the United States Federal Reserve.
Housing finance inflation was at the center of the financial crisis, and the GSEs were at the center of housing finance inflation. Any meaningful reform of the mortgage system, and therefore the financial problems underlying the recession, must deal directly with Fannie and Freddie. But last summer our elected representatives instead passed a 2,300-page financial “reform” act that purposefully avoided addressing this central issue.
Discussions of how to reform Fannie and Freddie have now belatedly begun on Capitol Hill and in the Obama administration. The process will be complicated and controversial. But if we are to avoid future distortions and government-inflated bubbles in the housing market, Fannie and Freddie can and should be dismantled.
Divided and Conquered
The core problem with GSEs isn’t hard to understand. You can be a private company disciplined by the market, or you can be a government entity disciplined by the government. If you try to be both, you can avoid both disciplines.
To fix that, the first step is to put the GSEs into receivership (as opposed to the current conservatorship), so that the small remaining value of the common shares and all their governance rights are wiped out. Then the restructuring can proceed, Julius Caesar style: divide them into three parts.
The first of those parts, unfortunately, must be a “bad bank,” a liquidating trust that will bear Fannie and Freddie’s deadweight losses–the $150 billion spent by the Treasury so far, plus the additional losses that are embedded in the GSEs’ portfolios and will be realized over time. According to various estimates by the CBO and private analysts, it will cost in the range of $200 billion to $400 billion to make whole the foreign and domestic creditors of Fannie and Freddie. That cost will unjustly, but at this point unavoidably, be borne by taxpayers.
All the current debt and mortgage-based securities obligations that bear the Treasury’s implicit but very real guarantee should be placed in these trusts to run off over time, with all the current mortgage assets of the GSEs dedicated to servicing them. These trusts will be responsible for liquidating the old GSEs. They can be modeled on the structure used in the 1996 act that privatized another GSE: Sallie Mae, the federal student loan company.
The second of the three parts should be formed by privatizing Fannie and Freddie’s prime mortgage loan securitization and investing businesses. All their intellectual property, systems, human capital, and business relationships should be put into truly private companies, sold to private investors, and sent out into the world to compete, flourish, or fail like anybody else. As fully private enterprises, they will be free to do anything they think will create a successful business–except trade on the taxpayers’ credit card.
When there is a robust private secondary market for the largest segment of Fannie and Freddie’s business–high-quality prime mortgage loans to the middle and upper middle classes–private investors can then put private capital at risk, taking their own losses and reaping their own gains. In this mortgage sector, the risks are manageable, and no taxpayer subsidies or taxpayer risk exposures are necessary.
Decades ago, there may have been an argument for GSEs to guarantee the credit risk of prime mortgage loans in order to overcome the geographic barriers to mortgage funding, barriers that were themselves largely created by government regulation. More recently, there may have been a case for using GSEs to get through the financial crisis that they themselves had done so much to exacerbate. But as we move into the future mortgage finance system, the prime mortgage market can and should stand on its own, just like the corporate bond market.
A private secondary market for prime mortgages should have developed naturally a long time ago. It didn’t because no private entity could compete with the GSEs’ government-granted advantages. Bond salesmen, pushing trillions of dollars of GSE debt and mortgage-backed securities to investors all over the world, basically told them this: “You can’t go wrong buying this bond, because it is really a U.S. government credit, but it pays you a higher yield. So you get more profit with no credit risk.” Although there was, and still is, no formal government guarantee of Fannie and Freddie’s obligations, what the bond salesmen told the investors was nonetheless true, as events have fully confirmed. The Treasury has made it clear that its financial support of Fannie and Freddie is unlimited.
There can be no private prime middle class mortgage loan market as long as Fannie and Freddie use their government advantages both to make private competition impossible and to extract duopoly profits from private parties. The duopoly element of the old housing finance system should not be allowed to survive.
The third part to be carved from Fannie and Freddie should consist of intrinsically governmental activities, such as housing subsidies and nonmarket financing of risky loans. These should move explicitly to the government, where they will be fully subject to the discipline of congressional approval and appropriation of funds. This would be in sharp contrast to past practice, in which the GSEs received huge subsidies and used some of the money to win political favor, all concealed off budget. Instead, the funding for these activities would have to be appropriated by Congress in a transparent way, subject to the disciplines of democracy. These functions of Fannie and Freddie should be merged into the structure of the Department of Housing and Urban Development, along with the government mortgage programs of the Federal Housing Administration and Ginnie Mae.
Ending Freddie and Fannie, SlowlybIt is unrealistic to expect to achieve all this at once, but by clarifying where we should arrive, we can start the journey. That process has become somewhat easier because Fannie and Freddie are basically government housing banks
now, overwhelmingly owned and entirely controlled by the government.
Fair and transparent accounting demands that the GSEs not receive the political benefits of off-balance-sheet accounting. The Accurate Accounting of Fannie Mae and Freddie Mac Act (H.R. 4653), proposed by Rep. Scott Garrett (R-N.J.), would require Fannie and Freddie to be part of the federal budget, a change recommended by the Congressional Budget Office. Honest, on-budget accounting would give Congress a strong incentive to junk the GSE model and restructure Fannie and Freddie on the principle of “one or the other, but not both.”
Congress should also take up a proposal from Rep. Jeb Hensarling (R-Texas), the GSE Bailout Elimination and Taxpayer Protection Act (H.R. 4889), which lays out a transition to a world with no GSEs. Hensarling’s bill would increase Fannie and Freddie’s capital requirements, reduce their role in the mortgage market, and establish a sunset on the GSE charters.
The ongoing, unlimited bailout of the GSEs will hit the taxpayers for much more than the $150 billion cost of the notorious savings and loan collapse of the 1980s. It is obviously difficult for Fannie and Freddie’s longtime political supporters to admit that the GSEs were a massive blunder. But that is now undeniable. The failure of Fannie and Freddie creates a perfect opportunity to restructure these hybrids, leaving no government-sponsored enterprise behind.
So there was this big jump in mortgage purchase applications today. I thought to myself, “Hmmmm, I wonder how many will make it to closing. And I wonder what triggered the pop.” Pop is relative of course. Yeah, it was a 9% jump from last week, but the level is still 35% below last year in the same week and 62% below the May 2005 peak (I sold my house in Florida in April 05, closed in June, thank you very much Mr. Greenspan).
So I dug a little deeper, held my nose, read the press release straight from the MB Ass. And there it was.
“The increase in purchase activity was led by a 17.2 percent increase in FHA applications, while conventional purchase applications also increased by 3.6 percent,” said Jay Brinkmann, MBA’s Chief Economist. “This is the second straight weekly increase in purchase applications and the highest Purchase Index level since the expiration of the homebuyer tax credit program. One possible driver of last week’s big increase in FHA applications was a desire by borrowers to get applications in before new FHA requirements took effect October 4th, which included somewhat higher credit score and down payment requirements.”
The old “BUY NOW before we make it impossible for you” trick.
So much for that pop.
I’ll be updating the chart and commentary in the Professional Edition Housing Report tomorrow. You can stay up to date with regular updates of the US housing market, along with the machinations of the Fed, Treasury, and foreign central banks in the US market in the Fed Report in the Professional Edition, Money Liquidity, and Real Estate Package. Try it risk free for 30 days. Don’t miss another day. Get the research and analysis you need to understand these critical forces. Be prepared. Stay ahead of the herd
The conforming jumbo loan limits, which allow homeowners in certain areas of the country to get government-backed loans of up to $729,750, have been extended for another year, according to the Mortgage Bankers Association.
Additionally, it provides $20 billion in loan commitment authority for FHA’s General and Special Risk Insurance Fund.
“Extending the existing limits is essential to helping borrowers continue to have access to affordable long-term, fixed-rate mortgage credit in today’s struggling economy,” said Robert E. Story, Jr., Chairman of the Mortgage Bankers Association, in a release.
“The current limits have been a key component of keeping the mortgage market functioning, helping keep mortgage interest rates low for consumers who want to purchase a home or refinance an existing mortgage.
Without such an extension, larger loans would have fall into the jumbo loan category, resulting in interest rates a percentage point or more higher than conforming loans.
The traditional conforming loan limit is currently set at $417,000 for one-unit residential mortgages.
Conforming jumbo loan amounts ($417,001 to $729,750) price at a slight premium to conforming loan amounts, but well below jumbo loans amounts.
While down 12.4% from the same period last year, the application totals for August are the highest since September 2009.
The run up in applications before the end of FHA’s fiscal year is normal and is likely to increase as reverse mortgage borrowers rush to complete the process before the Department of Housing and Urban Development lowers the principal limit factors in October.
The total amount of FHA applications for the month was 200,907 with a significant rise in prior FHA refinance cases. This included 86,569 purchase transactions, 104,652 refinance cases and 9,686 reverse mortgage cases. Included in the refinance count were 55,103 prior FHA’s (46.9% over last month), and 49,549 conventional conversions. In addition, 39 H4H cases were included in the refinance total.
There were also 6,645 HECM’s insured in August and 6,175 were the traditional reverse mortgage type.
As of the end of August, FHA has 558,316 mortgages in a serious delinquency category, yielding a seriously default rate of 8.5 percent. This includes all mortgages in bankruptcy, in foreclosure and 90 days or more delinquencies.
So far this fiscal year 270,964 claims have been paid. The bulk of these were for loss mitigation retention (164,744) and property conveyance (87,807).
OREGON REAL ESTATE ROUND TABLE 