NEW FANNIE/FREDDIE ‘CON’-JUMBOS ALREADY A BUST

Posted on April 18th, 2008 in Mr Mortgage's Personal Opinions/Research

YouTube Video on Fannie/Freddie ‘Con’-Jumbos

Just got off the phone with three of my top contacts at three of the nations leading mortgage lenders/banks. These programs are not selling at all. The volumes are very low. Banks are highly disappointed. The difference between a standard Fannie/Freddie (Agency) is roughly 75 to 100bps depending on the lender. Agency 30-yr fixed are roughly 6.25% with no points and Agency Jumbos are roughly 7 to 7.25%. Mortgage rates have gone up about .375% in the past few days.

For refi’s, nobody wants out of their 5/1 ARM, ALT-A interest only or Pay Option ARM into a 30-yr fixed at 7.25% where their payments increase substantially. Also, in over 50% of cases appraisal are not coming in at value. For example, the loan application is taken with an estimate of $600k and the loan is an 80% loan-to-value (LTV). When appraisal comes in, the value is actually $500k making the loan a 100% LTV and there are no programs available. This is happening on a vast amount the $417k conforming loans as well.

For the purchase money folk, rates are also too high for current property values. Plus, a down payment required is 10%+. Debt to income ratios have tightened, further reducing buying power. A household wanting to take advantage of a $700k Agency loan at 7.25% must earn about $175k per year at current rates. And that only buys a $770k home, which is low to moderate in most areas in CA. Surely not the first-pick neighborhood of some earning $175k per year. That same person could have purchase a $1.5 million home with little to no down payment nine short months ago..

In a nutshell, the new Fannie/Freddie jumbo programs are already a bust. They offer nothing to most people other than the few with perfect credit, who have a large down payment and make tons of money. That wipes out the vast majority of the buyers in CA. All while inventories of home for sale and foreclosures soar. Slowly over time, home values will gravitate towards the most readily available financing, which is Agency conforming $417k. This is just another example of how far CA Real Estate has yet to fall. -Best, Mr Mortgage

ADDITION TO ABOVE…a) a $720k loan at 7% on a 30-yr fixed is a principal and interest payment of $4,825 PLUS taxes and insurance of another $1,000 for nearly $6k a month. With a 40% debt-to-icnome ratio and reasonable other debt, the household income would have to be in very high $100k’s per year to reasonably qualify. b)10% down is the minumum but rates are higher with that LTV and good luck finding a second mortgage to 90% so LPMI is the only option, which adds even more to the rate c) credit score must be over 700 to qualify for the best rates. d) in region deemed ‘declining or soft’, LTV’s may be even lower requiring more equity for a refi or more cash down for a purchase.

32 Responses to “NEW FANNIE/FREDDIE ‘CON’-JUMBOS ALREADY A BUST”

  1. Great analysis, but this entry is really hard to read with small type and blue text on a white background.

  2. Look at leverages going up at C, LEH, MER, GS, MS

    they are trying to double down in the face of insolvency..

    people still have a disconnect at what the real issue (for the banks) is/are.

    but as long as the machine keeps calling it a credit crunch and not what it really is…..a solvency issue based on falling home prices.

    Keep up the good work!!!!

  3. Abolish the Federal Reserve.

  4. there’s probably plenty of CA buyers complaining about this but it’s really doing them a huge solid.

  5. Whoever said the rates would be the same? The limits were raised to provide liquidity in the market – that is to even offer a program for loans over $417,000. I don’t see investors beating down the doors to compete in this product. Until that time, don’t expect the GSE’s to take additional risk without something in return.

  6. There has always been a jumbo market over $417k. The agencies were supposed to reduce the spread on mid-range jumbos <$720k... instead we get something with basically the same spread as something +$800k. A good idea that resulted in no new net liquidity. What is really stupid is that the spread is almost totally based on the size of the mortage instead of the relative size of the down payment. Who is more likely to default - someone with $100k down on a $500k house, or someone with $500k down on a $1m house? In the current market, the latter gets charged a full 100-125 basis points higher.

  7. Money may be “available”, but with the deadly trifecta -more stringent guidelings, more stringent LTVs, and the propety value not there- people are out of options. Banks could loosen every income and credit score guideline in the work and it wouldn’t help at this point. Values are not there. The last thing in the world that banks are going to do is raising the acceptable LTVs back to 100% or, in this case of about every single city in America, BEYOND 100% LTV to get people loans.

    This is how the power transfer is going down. The middle class will not be able to weather this storm. And if I hear one more idiot claim that “we’re near the bottom now” or “fincial institions are near the end of there losses”, I’m going nuclear. There is not a peson on Earth that can predict what’s going to happen next. We are out in the dead center of uncharted waters…in a dingy.

    Good westite!

  8. Sorry about the numerous spelling errors. Batteries in my wireless keyboard are going South! You get the message though.

    Peace Out!

  9. It’s not necessarily a bust…Freddie Mac said it only expected $10-$15 billion in related sales for all of 2008, so spread across the country that’s not a whole lot of it.

    Pricing may also improve with time as things get rolling…until yesterday it seemed dead in the water, but now Freddie has actually pledged to buy the stuff.

  10. Love the videos, love the blog.
    Selling my house in Q4 2005 (and temporarily renting) was the best thing I ever did. A bank lost $190K, not including expenses after it became an REO and finally sold it a few months ago. I’ve seen many cases in my area (North California) like this.

    I’m not buying anytime soon. I’m going to wait a few more years to see how low prices will go. 2000 price levels are a given (IMHO). Real deals will be below this point.

  11. Maybe 2000 price levels inflation adjusted. Figure that prices should have gone up at least 3-4% just due to inflation, which puts us closer to 2003 nominal prices for 2009.

  12. Like most of your rants, this one is full of wishful thinking and non-sensical comments. You really don’t understand the basics of economics and seem to just want loan programs to get your shoddy customers through. Your interest rate analysis of what interest rate is required to get customers to buy was particularly amusing. Thanks.

    The real drivers of the GSE jumbo rate are:

    1) It is currently a limited time program as described by congress. This means that the MBS created by the GSEs are odd ball securities and an investor has to be willing to understand how the securities will perform. Given the newness and short term nature of the program, the investor base is smaller than that of old school MBS which drives up the rate.

    2) Higher balance mortgages display higher convexity – they prepay faster. For an investor, this means they require a higher rate to protect themselves from this higher convexity.

  13. Higher balance mortgages display higher convexity – they prepay faster. For an investor, this means they require a higher rate to protect themselves from this higher convexity.

    How does that make sense? Wouldn’t an actuarial deduce that a shorter lifespan means that they could actually charge a LOWER rate since their funds are returned sooner? Or is it just the uncertainty risk of having to re-invest the money at an unknown time and rate in the future?

  14. MortgageMan, you are correct in noting the limited investor demand for FNMA jumbo pools. The higher convexity, however, is unlikely even if rates rapidly change. Like jumbo Alt-A, the convexity can be “shaped” or hedged to mimick the desired sensitivity.

    Mr. Mortgage, your assumption that these programs were meant as a panacea are wrong. These are limited benefit programs that make Congress appear to be doing something to assist homedebtors. Both the intention and the effect are to help a limited number. Is that a con, or just election year politics?

    You are, however, correct in noting that the declining prices are the overarching factor in both loan qualification and performance. Not enough attention is being paid in the media to the effect of declining markets on otherwise good, performing loans. Loans made with 10 to 15% downpayments in the past are at or under water. This represents nearly 20% of all mortgages in the U.S.

    Some other thoughts:

    Many M/I companies have cut back insurance to 90-95% LTV and will likely cut back to 90% for bubble areas by May 1 (reading between the lines of new policy restrictions). Some of the big 7 already have.

    Many FNMA products are NOT being offered by lenders because the warrants are so restrictive. The lenders do not want to take on the extra risk. So even though FNMA offers a NI product, few lenders are carrying it.

    Regards.

  15. higher loan balances do not prepay quicker with the absolute lack of financing and falling values. Not in CA anyway…that may have been the case during the bubble years but not any longer.

  16. Toby…you are absolutely correct. As a matter of fact, most regions where agency jumbos would do the most good (if pricing came in) are deemed declining further restricting LTV.

  17. Toby – election year politics are a con and the press has made the new agency con-jumbos out to be the savior to the CA real estate and mortgage market.

  18. everyone looks far deeper into the real estate problem than need be. Facts are, we have gone from a period of lose and easy, low rate financing, which created ultimate affordibility. This has disappeared overnight. Now, we are entering a period of weakening economic conditions coupled with a mortgage sector that has reverted back to 1990. With such little financing available, housing prices will gravitate towards the most readily avail financing, which is $417k and historical means of valuation with is a multiple of household income, cap rates for inv properties etc. And the credit crisis and pressure on financial insti’s will not be over until housing stabilizes, which abviously will not happen for quite some time, especially in highly overvalued states in relation to average iincomes/prices within all MSA’s, such as CA.

  19. $417k might be historical means of valuation but the average is effected when it comes back the other way. Also, that is also assuming no additional layoffs or decrease in wages or even a wages that stay the same while everything else is rising.

    The Weimar Republic seems like the closest comparison that I can think of, that didn’t seem to help them or the rest of the world.

    Nice post Mr. M, your insight is greatly appreciated.

  20. Hi Kis,

    In a typical fixed income investment, when rates fall, the value of the investment goes up. This should make intuitive sense. The investor is enjoying a higher than market rate on the investment. Mortgages however are callable by the borrower. So when rates fall, MBS are paid off and the investor then has to reinvest at the new lower market rate.

    Toby – There is a bit of a prisoner’s dilemma with respect to investing in the new jumbo mbs. If the program is accepted, the spreads on the MBS will tighten and the primary rates will decrease. This effect may cause the GSE jumbo MBS to be even more convex than one would see with regular jumbo product. Also, increased convexity = increased costs and lower OAS which chips away at the nominal spreads.

  21. Hi MR MORTGAGE,
    you say on 19th april :” …This has disappeared overnight.”
    Why has this disappeared ?
    Thanks for your insights ,
    Pierre

  22. Pierre – where did I say that.

  23. it’s your latest comment on 19 th april :
    “everyone looks far deeper into the real estate problem than need be. Facts are, we have gone from a period of lose and easy, low rate financing, which created ultimate affordibility. This has disappeared overnight. Now, we are entering a period of weakening economic conditions coupled with a mortgage sector that has reverted back to 1990. With such little financing available, housing prices will gravitate towards the most readily avail financing, which is $417k and historical means of valuation with is a multiple of household income, cap rates for inv properties etc. And the credit crisis and pressure on financial insti’s will not be over until housing stabilizes, which abviously will not happen for quite some time, especially in highly overvalued states in relation to average iincomes/prices within all MSA’s, such as CA.”
    Thanks for your insights , Pierre

  24. thanks P. I was referring to all the loan programs that creatred the ultimate affordibilty ie: exotics. Even more traditional loans that had int only featurs of slightly higher ltv are gone. We literally have lost 95% of the financing options that were avail a year ago. The problem is the 95% that was lost accounting for about 66% of all the loans in the bubble states.

  25. MORTGAGEMAN …

    Is the typical “mechanical” investor – higher loan balance = higher prepayment. Higher convexity from the church of old dead mortgage saint.

    Hint from trading desk:

    What’s the coupon for which investor will PAY you premium for jumbo paper. That should be telling about what kind of prepayment speed your jumbo paper will pay.

    Always think this way about convexity now: Who’s buying your 500k loan house? The 300-400k ones. And so on and so forth to the 100k loan.

    What’s the 100k loan house doing? Not selling, losing jobs, credit pulled out. Thus the effect cascaded upwards, sometimes much more severe in % credit availability, as in the case of jumbos. Therefore the end result is invariably slower speed.

    Once there’s enough FRE/FNM jumbo backed MBS I will write an expose’ about it in my blog. Along with actual #s to back it up.

  26. It just amazes me that folks actually believed the new conforming loan limit would be the “answer to all prayers”! People “ASSUMED” it the next coming of Christ. Fortunately the financial savvy folks of the world are NOT surprised by the strick guidelines set forth by Fannie MAE. Time for folks to get a 9-5 job and stop trying to “REFINANCE” your neighbor. Just thought I would vent for a minute.

    Take care!

  27. Mr. Mortgage,

    I am very happy to hear someone who is on the same page as I am.

    I just saw one of your videos (Freddie and Fannie Jumbo Con) and I don’t need to see or read anymore….I respect everything you say and write.

    I have been researching this foreclosure market since 2004 and started to anticipate the mortgage crash since the end of 2006.

    I saw all of this coming and I just wanted to thank you for sending your common sense messages thru the internet.

    The past 4 years I went thru such a struggle trying to convince my 3 partners where this market was heading, and you guessed it…they did not listened.

    Long story short…mortgage, real estate, and escrow companies all closing down this Tuesday (4/22)…I heard thru the grapevine. In January I decided to end the efforts, gave up ownership, and moved to another office.

    Today I help people in foreclosure with short sales and I have partnered up with 2 investors and we are stocking up on some good properties with non-traditional ways of buying homes at such low prices.

    I knew this day was going to come….where originating a loan, getting it approved, and funding it was going to be like pushing an elephant thru a small tunnel filled with little mice (extremely difficult). And that’s coming from a 15 year loan veteran once employed with Countrywide and Wells Fargo.

    I hear it from all my loan agent friends. They are having a very hard time and then they ask me what am I doing? I tell them, “Not loans.”

    This will be a different year. Have we hit bottom yet? I don’t think so. There’s more to come.

    Just like you said in your video “the prices/values need to adjust with what the consumer can realistically afford.”

    Thank you for your opinions.

    Rick

  28. I had made an observation while in Gatlinburg, TN. on a couple of vacations up there. If you are not familiar with Gatlinburg, it’s has become quite a tourist attraction. I can’t even imagine how many cabins have been built up there.

    Well, I was there twice in the summer and once over this last New Years. What I have witness up there is a huge increase of cabins for sale. Now what I didn’t witness was a decrease in price with this increase of supply. Now there is a reason for that… most of these cabins are rentals. So, up to now owners were getting rent for these cabins so there was no incentive for to sell for less.

    To me we have only just begun this downward spiral. What you have witness in the last 6 months is only starting to slide… wait till wages either stay even or decrease and unemployment goes up further.

    The cabins I am talking about go for $600k-$2 million. If you go up some of the mountains, the realtors put the FOR SALE signs on the corners of the street, since some of the roads are very long. Many of these corners have signs in the 10 range. The one mountain I was on over New Years… I would say 20-30% were FOR SALE. Of course, none of them were selling, and no one was dropping prices.

  29. “In a nutshell, the new Fannie/Freddie jumbo programs are already a bust. They offer nothing to most people other than the few with perfect credit, who have a large down payment and make tons of money.”

    Uh, which part of that is a bad thing? I don’t want FRE/FNM on the hook for any more toxic crud. If you want to borrow more than $417,000 with a gov’t guarantee, you damn well better have good credit and big down and salary! Are you saying we should go back and use 2006 standards? NOT.

    This is a GOOD thing. House prices must fall. They must fall the most where funny money pushed them up the most. Get ready for it. It must happen.

  30. […] 4/18 MR MORTGAGE ORIGINAL STORY […]

  31. […] -New Fannie/Freddie Jumbos Already A Bust […]

  32. Judging from the reluctance of sellers to lower prices, the lenders to ease on loans and the economic conditions not fairing well, house prices will continue to fall for many years to come. Judging from Japan’s example they have 30%-40% to go down still. But Japan’s house price deflation was mild as paired with the strong savings of the people there. So if I take a worst case scenario here, where most households are almost bankrupt, house prices could slide by as much as 50% of the 2006 values and will take 4-6 years to find bottom. Of course nobody knows what the heck will happen in the future but at least I base my stupid predictions on hard non-delusionary facts.

    Have fun!

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