Like many good proposals for reforming mortgage finance, lowering the loan limits insured by the GSEs and FHA likely will not happen because it will lower house prices.
Irvine Home Address … 5732 SIERRA CASA Rd Irvine, CA 92603
Resale Home Price …… $1,999,900
The grass was greener
The light was brighter
With friends surrounded
The nights of wonder
Looking beyond the embers of bridges glowing behind us
To a glimpse of how green it was on the other side
Steps taken forwards but sleepwalking back again
Dragged by the force of some inner tide
At a higher altitude with flag unfurled
We reached the dizzy heights of that dreamed up world
Pink Floyd — High Hopes
During the housing bubble rally, the grass was greener and the light was brighter. At higher prices with boundless hope, we reached the dizzying heights of real estate wealth, a dreamworld of unlimited appreciation and personal spending power.
Currently our housing market is completely supported by and dependent on government loan guarantees. By offering to assume all risk of loss, the federal government though the GSEs and the FHA is underwriting loans at historically low interest rates. This caused money to flow into mortgage lending at a time when proper risk management was to flee. This kept some of the air in the housing bubble which allowed the government to get control of the market's descent. The question is how do we move forward?
What do we do with a housing market completely hooked on government juice?
Treasury report advocates slashing GSE jumbo loan ceiling
Reducing conforming loan limits at Fannie Mae and Freddie Mac will help reduce the GSEs' dominance in the mortgage market by driving jumbo mortgage financing back to the private sector for financing, the U.S. Treasury said in its “Reforming America's Housing Finance Market” report on Friday.
Under the Treasury's plan, a 2008 increase in loan limits that allowed GSEs to temporarily back loans valued as high as $729,750, would expire on Oct. 1, reverting to the previous ceiling of $625,500. In a report from the George Washington University Center for Real Estate and Urban Analysis this week, researchers concluded that the Federal Housing Administration substantially raised its risk when it agreed to insure GSE loans valued as high as $729,000 during the financial crisis. The report advocated a return to 2006 levels when the FHA loan ceiling topped out at $362,790.
The Treasury report also said lowering conforming loan limits on jumbo mortgages and requiring a 10% down-payment for GSE loans will eventually ease the mortgage market back to the private sector while containing systematic risks.
Easing the market back to the private sector is secret code for easing the housing market off interest rate subsidies and loan guarantees. Private lending evaluating and taking risk would be great. Private lending taking risk with assumption of an Uncle Sam bailout would be a catastrophe. Which do you think we would get?
In the Treasury report, the current GSE-model is criticized for allowing Fannie Mae and Freddie Mac “to behave like government-backed hedge funds, managing large investment portfolios for the profit of their shareholders with the risk ultimately falling largely on taxpayers.” To curb some of the risk, the PSPAs, which provide financial support to the GSEs, would require the GSEs to wind down their investment portfolios at a rate of no less than 10% annually.
To brace for risks and shocks in the economy, the Treasury also advocates for a mortgage securitization model where securitizers and originators are required to retain 5% of a security's credit risk when a loan is sold to investors.
In addition, the Treasury would require banks originating loans to have more skin in the game by holding higher levels of capital to withstand economic downturns and to hedge against the risk of default on higher-risk loans.
Write to Kerri Panchuk.
Turning lending over to the private sector would be a great thing; however, as Bill Gross pointed out:
Ninety-five percent of existing mortgage creation over the past 12 months were government guaranteed. The private market was nowhere to be found because they charged too much. It was the cost of private origination and securitization, perhaps more than any other factor, that justified government involvement. Prime, but non-conforming, mortgages (jumbos, insufficient down payments) were being purchased by PIMCO in the hundreds of millions of dollars every week, but at yields of 6, 7, and 8%. If that was the risk/reward tradeoff, compared to FNMA and FHLMC yields at 3.5–4%, how could policymakers pretend that the housing baton could be quickly and cost-effectively passed back to the private market? Few, if any, could afford a new home at those interest rates. If you were a believer in the dominance and superiority of private markets, how could you deny the signal that markets were sending – that the risk was too high given the substantial losses of recent years?
Any turnover of lending to the private sector would need to be phased in to stop mortgage interest rates from spiking and causing the Bernanke Put to prompt the fed to intervene.
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Report: FHA should lower loan limits
The Federal Housing Administration substantially raised its risk when it agreed to insure loans valued as high as $729,000 during the financial crisis, says a new report from the George Washington University Center for Real Estate and Urban Analysis.
“Without question, FHA played a major role in keeping the housing market afloat during the economic collapse of 2008 and 2009, and we need to be careful about cutting back too rapidly,” said Van Order, Oliver T. Carr professor of real estate and chair of CREUA.
The FHA has been filling this role in every period of housing market instability since the Great Depression. in the past, since the FHA underwriting standards are so strict and the paperwork is so cumbersome that the private mortgage market was able to offer competing products and take market share from the FHA. Since the government is not concerned about market share or making profits, having the FHA as a low-volume emergency back up is probably a good thing.
“However, these large loan sizes are unlikely in the long run to assist FHA in reaching its historical constituencies,” he added. “Our research indicates that larger loans are likely to perform worse than FHA’s traditional market, and we are concerned that the rapid increase in FHA’s market share will be hard to manage.”
Of course they will perform badly. These loans were given out to overextended borrowers to acquire property declining in value. Strategic default will be a serious problem for many of these loans.
Researchers who worked on the report say FHA loan limits hovered at $362,790 in 2006, about $400,000 less than today's limit.
With loans valued at or above $350,000 performing worse than smaller FHA-insured loans, the research center is advocating a return to lower FHA loan limits and a renewed emphasis on first-time and minority homebuyers. Researchers who compiled the report found higher loan limits do little for minority homebuyers since 95% of the agency's African-American and Hispanic borrowers opt for loans valued under $300,000.
Write to Kerri Panchuk.
The bursting of the housing bubble forced the GSEs and the FHA to start making loans to upper middle class borrowers who shouldn't require subsidies. Transitioning the housing market back to a private system with the free market determining interest rates will take a long time, and it will not be painless.
Lower loan limits would severely impact markets like Irvine
I wish I knew where this debate on mortgage finance reform is going. I suspect they will talk a lot, the rhetoric may get heated, but in the end they will do little or nothing now preferring to kick the can down the road to another crisis.
However, if they do lower the jumbo conforming limit from $729,750 to $417,000 or below, the meat of the Irvine market would suddenly have to pay jumbo rates. We would be among the first markets in the country to experience the transition from public to private financing. Jumbo rates are somewhere between half-a-point and one point higher than conforming rates. If future buyers are facing higher interest rates, their hopefully higher incomes will not be leveraged as much, and the loan balance will not be larger.
Markets where jumbo conforming loans ($417,000 to $729,750) are prevalent, the market impact will be the most noticeable. If you combine that with the possibility that loans that large will no longer be tax deductible, and borrowing huge sums to take a position in real estate doesn't seem quite so appealing. Future take-out buyers will not be so leveraged.
$30,000 plus 15 years equals $1,700,900?
The owners of today's featured property paid only $299,000 for this corner lot back in 1996. These owners used a $269,000 first mortgage and a $30,000 down payment. It looks like they tore down what was there and built a new home on the lot. Apparently, it was quite the upgrade because now they think this property is worth many times what they paid for it.
They refinanced on 2/2/2003 for $412,000 which likely paid for the upgrade and renovation. The description says this owner is an architect. If so, he is starving right now, and the 4/27/2010 refinance for $578,000 probably went to pay the bills. This isn't the only architect i know trying to sell their house because they aren't making any money. Very sad.
So this starving architect is selling his dream home. It may be sad to lose a dream home, but if we walks away with over a million dollars, he shouldn't cry very long.
Irvine Home Address … 5732 SIERRA CASA Rd Irvine, CA 92603 
Resale Home Price … $1,999,900
Home Purchase Price … $299,000
Home Purchase Date …. 2/20/96
Net Gain (Loss) ………. $1,580,906
Percent Change ………. 528.7%
Annual Appreciation … 12.9%
Cost of Ownership
————————————————-
$1,999,900 ………. Asking Price
$399,980 ………. 20% Down Conventional
4.99% …………… Mortgage Interest Rate
$1,599,920 ………. 30-Year Mortgage
$413,628 ………. Income Requirement
$8,579 ………. Monthly Mortgage Payment
$1733 ………. Property Tax
$0 ………. Special Taxes and Levies (Mello Roos)
$333 ………. Homeowners Insurance
$125 ………. Homeowners Association Fees
============================================
$10,771 ………. Monthly Cash Outlays
-$1650 ………. Tax Savings (% of Interest and Property Tax)
-$1926 ………. Equity Hidden in Payment
$776 ………. Lost Income to Down Payment (net of taxes)
$250 ………. Maintenance and Replacement Reserves
============================================
$8,220 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$19,999 ………. Furnishing and Move In @1%
$19,999 ………. Closing Costs @1%
$15,999 ………… Interest Points @1% of Loan
$399,980 ………. Down Payment
============================================
$455,977 ………. Total Cash Costs
$126,000 ………… Emergency Cash Reserves
============================================
$581,977 ………. Total Savings Needed
Property Details for 5732 SIERRA CASA Rd Irvine, CA 92603
——————————————————————————
Beds: 5
Baths: 5
Sq. Ft.: 5403
$370/SF
Lot Size: 10,160 Sq. Ft.
Property Type: Residential, Single Family
Style: Two Level, Contemporary, Mediterranean, Modern, Tuscan
View: City Lights, Hills, Mountain, Panoramic, Yes
Year Built: 2008
Community: Turtle Rock
County: Orange
MLS#: S646188
Source: SoCalMLS
Status: ActiveThis listing is for sale and the sellers are accepting offers.
——————————————————————————
Stop! You have never seen anything like this magnificent custom home with a unique floorplan that offers the ultimate in privacy, a flexible floorplan, outstanding outdoor entertaining areas built with remarkable finishes. This trend setting home, designed by the owner/architect, offers a huge (1,049 SF) home office with conference room which could also be a separate apartment or in law suite. In addition, the layout offers 2 master suites on the first floor, 2 view retreats, a welcoming 459 sq. ft. outdoor veranda with fireplace and 12' wood beamed ceiling, a huge (813 sq. ft) upstairs wing dedicated to entertaining while capturing the fabulous sunsets, city lights, snow capped mountains and surrounding hillsides. At the heart of the home is the kitchen with exquisite custom mahogany cabinetry designed by renowned Ziething Cabinets w/ gorgeous granite counters and top of the line stainless steel appliances. Over 2,300 sq. ft of travertine stone flooring throughout.
Is it possible this property outgrew its neighborhood? Looking at the homes nearby, they seem to be all 1-level modest ranches, maybe half the sqft of this.
Because Turtle Rock is desirable, and since it is the only neighborhood in Irvine where you can find a large lot, many of these properties have been torn down and rebuilt with monster properties like this one. That trend will continue.
Yes, and that is quite the location and house. Is it worth $2M? I dunno, but it can’t be far off the mark from land/replacement cost. (but don’t take that as advice to buy).
After all, it’s not what someone paid for something, but what it’s worth… the housing bubble has taught us that.
For example, I bought a stock in March 2009 that is now yielding more in a year than its price was at the time. I have a nearly 16 bagger in the stock; that’s what the market says it’s worth… it doesn’t matter what I paid for it.
If he gets a million out of it, I’m sure he got what it’s worth.
BTW, I have a friend building a house in that area, and have it on prettty good authority that a house of this size/quality is going to be $300/sq ft at least to build. Even being an architect, means he only saves on the architect fee. He could be into this house 1.7 or more. He may not be making that much money on the place.
Chuck
Chuck
Saw that listing last summer and was impressed by the design. Must have got no bites because it was delisted and re-listed again recently.
Not sure if the owner is starving considering a $600k mortgage should be easy to handle… I think they are just trying to cash out.
But it seems like south of $1.5m would be a more “reasonable” price (you can’t ask $2m for a 3-car tandem, it’s needs to be 3CWG).
Then there’s this:
Obama may limit tax breaks for rich
NEW YORK (CNNMoney) — President Obama on Monday may propose limiting tax breaks for the rich, budget and policy experts say.
In the president’s past two budget requests, he called for limits on the value of itemized deductions for those in the top two tax brackets. That would include deductions for mortgage interest and charitable contributions.
… Take the mortgage interest deduction: It is seen as a big spur to housing sales, which in turn can bolster big swaths of the economy. But some argue the generous deduction contributed to an unstable rise in home prices, and tax statistics show that the wealthiest households disproportionately benefit.
It would be nice, and it is badly needed, but the Republicans will block it for sure. Obama caved in on the Bush tax cut extension for the rich, and he and the Democrats will do so again. At best he is only floating this to sooth his supporters and as a bargaining chip to give away in negotiations. I hope to be surprized on this one, but wouldn’t bet on it happening.
Personally myself, I’m never in favor of higher taxes. But I’m also not in favor of big housing subsidies.
This law is really less about wealthy vs middle class, and more about many states paying/subsidizing the cost of California’s housing bubble.
Why is it that a rancher in Texas, making the same income as a professional family in Newport Beach, is paying an extra $15,000+ in federal taxes due to the mortgage interest deduction.
Oh, another thing. If I were in charge, I would cap the mortgage deduction based on the loan balance, and NOT household income. We should have a tax code that encourages savings, NOT consuming.
The deduction is capped based on loan balance. The cap is currently $1,000,000. If the mortgage is above $1 million, you cannot deduct all of the interest.
Also, it is a proven fact that Californians subsidize the rest of the country, not the other way around. Californians pay billions more in federal income tax than the feds “reinvest” in California.
While I do think the lowering of limits and moving to higher cost private mortgages will impact housing prices as a whole, I’m not sure it will “severely impact” Irvine.
A good number of Irvine transactions are high down or all cash payments so the lower limits (and rates) may have little effect.
But let’s look at some data from Scott Gunther AKA IrvineRealtor:
To be fair, he does go on with the caveat that lower limits should not be dismissed.
http://www.talkirvine.com/index.php?topic=1453.0
Regardless, I do think that until the economy and unemployment improves (despite where the DOW is at), it’s going to be tough to lower those limits across the board (maybe parts of OC will get classed as a higher cost area like Hawaii… heh).
1.6% used FHA loans in Irvine, how many needed to .5%, .8%? Not sure but it’s low enough to stop talking about FHA loans in Irvine when the median cash down payment in Irvine is near 30%.
Talk Irvine strikes again with the ugly Irvine facts.
Irvine has held up very well.
Per Redfin, the Irvine selling price per sqft:
$328 = 2/14/2011 <-BTW, that's a New Low $336 = 2/15/2010 $334 = 2/16/2009 Here's the big question that we need to ask ourselves. What’s going to happen to Irvine housing prices when mortgage rates do finally increase? I’m not talking about an increase of 200-300 bps. How would an 11.8% 30-year jumbo mortgage impact Irvine?
I think a more important question would be how would a 11.8% mortgage affect non-premium cities?
I don’t think it’s going to happen… at least for the sake of my children when they want to buy a home in 20 years.
I don’t think it’s going to happen… at least for the sake of my children when they want to buy a home in 20 years.
Here’s the mistake we’re making … better yet, here’s the mistake we’ve made in this country. When housing prices outpace the rate of income advancements, the higher cost have to be absorbed in lower interest rates. We can not have an economy that is dependent on cheap money, because it encourages too much speculation in assets and too much debt.
The BIG LIE is that the American Dream can only be passed to the next generation at a higher capital cost. People need to stop looking at their houses as a “nest egg”.
It might hit “premium” regions worse than other areas. If you live in flyover country and are spending 20% of your income on housing, you can absorb a rate hike easier than if you are living in Irvine and are already spending 30-40% of your income on housing.
I am sure that whoever does buy this house; it will only be for the sake of the children and will not at all be a trophy to impress the Joneses with.
i hope for the sake of my children and my country we see 11.8% interest rates very soon.
We sold our Woodbridge condo last month for $340
sqft.
But that is FHA. How many were FAN/FRE or VA?
The High Cost Area Temporary limits to $729k will likely sunset in October 2011. There is a Standard Conforming loan amount of $417,000, a High Cost Area Conforming loan amount at $625,500, and the temporary limits. Ratcheting down the $729k temporary limit to $625k national limit will also lower FHA’s loan limits as they are linked.
What people don’t remember is that Conforming loan limits were supposed to be reduced as early as 2006, but political and industry pressure was forced upon the Agencies to retain the higher limits. The free flow of cheap money at these levels allowed prices to halt their free fall, but only because the Agencies had to be pushed into raising the temporary limits, kicking and screaming the entire way.
Once $625,500 becomes the maximim, Irvine prices will falter as they will in any area that’s had access to the temporary loan limits. Non-Agency lending terms are not just higher in rate, these loans are also more restrictive in the underwriting guidelines. When private money isn’t given Government backing, risk tolerance shrinks. Is that a bad thing? Not at all. It’s how you or I would operate if we were lending our own funds. The collateral damage though will be sellers between $850k and $1M come October. Either they will withdraw from the market or slash prices to attract buyers who have suddenly found themselves unable to obtain financing.
My .02c
Soylent Green Is People.
Thanks for the info, but you know government will extend that high limit into 2012….what’s the over under on that bet?
Hard to tell. The Administration and the Agencies want to lower the temporary limits. There’s been considerable whispering about it in recent days.
On the one hand if prices continue to fall, the limits will be extended. If prices are flat, there’s less incentive to extend. I’m a betting man, but at 50/50 odds it’s merely a coin flip. There isn’t enough upside juice to bet either way.
My .02c
Soylent Green Is People.
I understand that this post is an introduction and I’m no real estate math expert, but I’m wondering if using current income to property value to project rough future values.
Assuming Gross’ value of 7%, adding the premium between bond investors and actual, couldn’t we get a rough future interest rate?
Then, using that rough interest rate, median income, DTI, and 20% down, couldn’t we come up with a new value of the loan? Then couldn’t that value be compared to the some of the possible maximums (417,000 or 625,500 or 729,000) ?
Then, couldn’t the answers be compared to areas in Irvine that are above or below certain values to see which would be most impacted? (Those above 729,000 would not be impacted, right?)
Is my logic flawed somewhere?
They should change their asking price to $1,888,888. That would draw in all those FCB’s that are making wise and rational home purchases around Irvine.
-Darth
Inflation – serious inflation is comming. Think stagflation of the 70s or the ‘screwinflation’ of the 2010s…
Both the US and housing in the US go over the cliff when rates on the 30yr bond hit 5%.
The US will not be able to make it’s interest payments without SIGNIFICANT cuts and those same SIGNIFICANT cuts will come to housing prices.
This will be 7% mortgage rates and 700Billion dollars a year in interest on our EXISTING US debt. Total US 2011 tax revenue is 2.2T. That means that we will be spending a third of our tax revenue only on debt service.
Grinding lower in housing especially in higher priced areas is here for the next decade or two.
Higher taxes are coming – they must. Lower lending limits and higher rates are also guranteed.
Get out of the weeds. Look at the big picture and ask yourself why is NOW the time to buy?? No hurry… grinding lower.
Don’t tell that to PR, tenmagnet, or ochomehunter. According to them, interest rates shall continue to break record lows! SO MUCH for the “crash”.
Well considering mortgage interest deductions are a just another way taxpayers money is used to bribe the banking cartels, I would wholeheartedly agree with canceling these “deductions” permanently. Of course a corresponding reduction in Federal income taxes would be also be necessary for this to be fair.
Since the Fed is still inclined to continue the charade, I’m would have to agree with them.