Monday, January 28, 2008

Stimulation Via Jumbo Loans? Really?

Part of stimulating the economy includes temporarily raising the limit for jumbo loans from $417K to $729,750. Jumbo loans are a significant issue in high-cost areas like Los Angeles, where the median price for a single-family home is over $588K. The article reflects the current problem that "few banks are approving bigger loans and, when they do, the interest rates generally run 0.75 to 1 percentage point higher than for loans under $417,000." The reason? Risk. Larger banks that can afford to lend and hold the note can't sell them off like other loans (allowing for an influx of cash), and "smaller institutions aren't equipped to manage the extra risk of holding them on their books." That said, don't get me started on the notion of selling or bundling risky loans because that's how this whole mess got started in the first place.

Though the national housing market is still over-inflated, it's reasonable to expect non-luxury homes to stay above the $417K level in certain areas. As a result, I suspect this should help in certain high-cost areas, but will it help the economy as a whole?

That said, there are quite a few devils in these details, per Herb Greenberg's MarketBlog:
  • New borrowers still have to qualify. Fannie/Freddie is full doc only primarily.

  • Without stated income for wage earners, it’s tough to qualify for a $700,000 loan.

  • In 2005 to 2007, 70% of all jumbos were stated income for a reason: Ninety percent of all stated income borrowers lied about their income to qualify.

  • Refi’s will still have trouble due to values dropping in jumbo areas by such a large amount. These are the ones that really need the help.
He states an example:
"For the past several years, a husband and wife working at McDonald’s for two years could borrower $650,000, STATED income no problem. They just put enough money as income listed on the application to qualify. Wall Street banks that ultimately bought the loans did not care. Lenders also qualified at interest-only payment rate with zero to 5% down. Credit scores at 600 were okay.

NOW, you must have earned $135,000 to $150,000 FULLY DOCUMENTED for the past two years and have a current pay stub and average ‘other’ debt to borrow $650,000. You must have at least 10% equity or down payment. You must have a credit score of 700 or above. This is not a large number of the population."

Essentially, Greenberg figures "This should help some people with large incomes buy homes. That is about it." Personally, I believe this eludes to the reality that this time last year, people who were unwilling to get a risky loan were priced out of certain housing markets, large incomes or not.

I'm just saying.