The Problem With Fannie & Freddie’s New Cap
Feb 8th, 2008 @ 4:26 PM by Alden Smith
Recently I reported on the new guidelines to be put in place for Fannie Mae and Freddie Mac, effectively raising the cap on jumbo loans from their current level of $417,000 to a new cap of $729,750. Typically, these loans are about 0.25 percentage points above smaller, so-called conforming mortgages. You have to wonder who this will benefit the most – people wanting luxury homes, or people that are struggling just to keep a roof over their heads.
Who will benefit from this new legislation? Currently, the markets in California, New York, Florida and along the East Coast are those that will benefit from this legislation. Home prices are typically much higher in those areas. The thought here is that this bill will encourage lenders to charge lower rates on the larger loans. Well and good. I have to wonder, however, how much a stimulus this will be for the market overall.
The hardest hit area of the country today has been in Ohio, with Cleveland being especially hard hit with foreclosures and people being put on the streets due to the sub prime mess. I doubt very seriously that these folks will run out tomorrow and buy a house valued at $729,750. Homes in Cleveland reached $147,000 in the third quarter, 32% below the national median. That’s a long way from $729,750.
What analysts are saying is that by the time they are able to get this legislation in place, it may just be a day late and a dollar short. First of all, the need to implement the law, make new mortgages, get Fannie or Freddie guarantees, turn them into securities and get the new market for those securities functioning. And by the time this happens, the mortgage market is going to be in even more serious trouble if something isn’t done quicker and does more to level the playing field.
Analysts also say that people who own these high valued homes tend to refi much quicker than conventional mortgages, so this will make these loans less attractive to investors in mortgage backed securities.
The window is very narrow, the people who own high value homes will scramble to refi, and from my POV there is little to gain from this. Let’s hope I am wrong.
- Posted in Mortgage Refinancing, Mortgages
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