Not Many Positives Coming Out of Jumbo Market Changes

With the House and Senate working to hammer out differences in their respective approaches to solving the housing/credit crisis, problems are already emerging with other solutions proposed or enacted tackle pieces of the problem.

The New York Times reported on Wednesday that there are real problems with the jumbo mortgage aspect of housing rescue.

Several months ago Congress, in an attempt to loosen up credit in costly markets, raised the loan limit on loans which could be backed by government-sponsored housing finance agencies such as the Federal Housing Administration from $417,000 to amounts up to $730,000, depending on location. The change was intended to reduce rates for more borrowers (jumbo loans have always carried a higher rate than conventional loans, i.e., those below the loan ceiling) and to stimulate lending. The goal was not aimed at helping subprime borrowers but was aimed at credit-worthy borrowers with acceptable down payments who wanted to refinance or purchase a home in expensive housing markets like San Francisco or New York. It was thought that helping thousands of borrowers access billions in new loans would stimulate the housing market, spur consumer spending and possibly avoid or at least reduce the effects of a recession.

Instead, Matt Richtel, reporting in the Times says the effort to make it easier to get jumbo mortgages has yielded frustration and disillusionment. Since the rules took effect April 1, many borrowers and their mortgage brokers say the new loans are either not available or the rates are far higher than they expected.

Richtel quotes the president of one mortgage corporation as saying that the program �is so much of a failure that it�s really unbelievable�.Like coming up with a vaccine to a terrible disease, and then not giving it to people, or making it too expensive.�

But, Richtel said, rates have not dropped � at least not to the degree that many borrowers and mortgage brokers had expected. In some cases, �conforming� loans, so designated because they conform to the old government-sponsored rules, are a full percentage point below the newly conforming jumbo loans intended to be covered by the new law.

One reason that the loans are not competitive has to do with that now familiar word, securitization. Lenders can package and sell conforming loans as mortgage-backed securities either on the open market or to Fannie Mae or Freddie Mac. The private sector is open to these securities because they know that they can resell them later to housing finance agencies. Thus the conforming loans can offer a lower interest rate to borrowers.

Freddie Mac recently announced it would buy up to $15 billion of the newly defined loans. That could lead to more loans and lowered interest rates, but there is not a lot of time. At the end of the year the system is supposed to revert to the old loan limits and lenders as well as secondary investors are hesitant about changing rules and operations for a short time.

Two other major initiatives, a program run by the Federal Housing Administration and proposed Federal Reserve rules on lending which are about to emerge from the comment period, are also under attack. We will take a look at these as well as attempt to catch up on the status of the very different housing bills passed by the House and Senate which are being worked out in compromise committee.

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