For those of you that want to know most everything on the new Fannie Mae/Freddie Mac (agency) Jumbo loans and their new-found expanded purchasing capacity that was supposed to save the real estate market beginning last March, this post is for you. Remember, this was being viewed by many at the time as a license for these two companies to blow themselves up.
This is all a complete failure and sham and has been from the onset in my opinion. Throwing crap against the wall at taxpayer to see if it sticks is not a good game plan. In addition to the new Jumbo programs being virtually unsalable to the general public in this market environment, the agencies are using their expanded capacity to buy their own mortgage securities back. This action backstops themselves and those holding agency paper such as Bill Gross (guess what other “luminary” is now working at the PIMCO bond house now and benefits from this? That’s right — Alan Greenspan).
Pumping $10s of billions into the agency MBS market may also provide false support and marks on agency MBS prices. If they are providing price support for their own securities and suddenly have to stop, the agency MBS market mistakenly thought to be very safe, could suffer a severe dislocation like we have seen with most other mortgage-related securities. Remember, these securities are not backed by the Government other than $4.5bb total by the Treasury, they are backed by Fannie and Freddie.
Just three months after the new programs and expanded funding capacity was put into effect, it is already evident that this is just another financial sector bailout for those in the agency MBS market. Below are three stories. This post is long, but once you read it you will have this topic covered. Let’s begin.
On April 18th, I released a YouTube video and research regarding the total lack of demand for the new agency ‘Con-Jumbos’. The new programs kicked-off in March to much fanfare led by Frank and Paulsen, but today we learned that my initial research was spot on. Fannie Mae has only done about 48 jumbo loans and Freddie Mac 440 according to the Mortgage Finance newsletter. That is in the entire nation! You must be kidding me, right?!? (This loan count is based upon a $500k loan amount).
Mr Mortgage April 18th YouTube Video on Fannie/Freddie ‘Con’ Jumbos:
“Since the rule change took effect in March, Fannie Mae has packaged $24 million of jumbo loans into securities, while Freddie Mac added $220 million, according to the Inside Mortgage Finance newsletter.”
I call them “Con-Jumbos” vs. Conforming-Jumbos or Agency-Jumbos because they were being portrayed as the savior to the housing market in higher values states and regions by the Solons and talking heads on bubblevision for months. Nothing could have been further from reality and anyone in the mortgage business for even the shortest amount of time could have told you this.
Below is my original April 18th post on the topic. I received flack over this by pundits and mortgage ‘professionals’ who said ‘you have not given this enough time’. I didn’t need to. I know what the interest rate levels have to be to get people into fixed rate loans and compete with the exotic loan affordability that was lost. A 6%-7% 30-year fixed is much too high with today’s prices (still). I also understand the reality of all of this and the math. Simply, who in the world would want to refinance into a 7% agency Jumbo when you currently have a nice, low-payment exotic loan? And what percentage of the population can qualify for a purchase loan with 7% rates, tight credit guidelines and large down payments required?
Note that most of the original post below still applies other than rates have changed. The rates on <=$417k loans are higher and on “Con-Jumbos” are slightly lower than quoted below.
April 18th post – I 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 was a low to moderate neighborhood in most areas in CA and now many of these priced-ranged neighborhoods are riddled with vacant homes, subsidized renters and wild card sales going off 20-50% below recent comparable sales by those who bought the properties out of foreclosure at significant discounts. These neighborhoods surely are not the first-pick of some earning $175k per year. That same person could have purchased 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 homes for sale and foreclosures soar. Slowly over time, home values will gravitate towards the most readily available financing, which is standard 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-income 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 minimum 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.
Then on April 30th, the New York Times came out with a story echoing what I said on April 18th. I was so thrilled that somebody actually agreed with me that I immediately released the post below:
May 2nd post – A couple of weeks ago I released an update on how bad I heard the new Agency-Jumbo programs were selling and how the overall interest in them was bleak. If they just would have asked me, I would have told them that in the past many years 30-yr fixed rate Jumbo loans never really sold well unless the rates got down to the lower 5% level because most could just not afford the payments or benefit from refinancing. Of course, my reports a few weeks ago were ridiculed by many saying ‘give it a chance’ and ‘it is so new, you don’t know what you are talking about’.
But even without my friends telling me how bad it really was, I knew they would not sell because I understand the math. Who in the world would want to refinance into a 7% agency Jumbo when you currently have a nice, low-payment exotic loan? And what percentage of the population can qualify for a purchase loan with 7% rates, tight credit guidelines and large down payments required?
From day one I have said “the new agency Jumbos are for rich people to buy homes. The very same people who could have gone to any bank they wanted and obtained a loan”. Perhaps agency rates are slightly lower than bank portfolio products, but not by much.
The simple fact is most people do not earn enough to qualify for these programs. With current rates on a 30-yr fixed, a household must earn roughly $100k to afford a loan amount of $417k. To fully take advantage of the new Conf-Jumbo programs at $729k, you must earn over $180k. Gimme a break…that is a small fraction of the population.
Guess what…the NY Times came out repeating what I said two weeks ago. Therein, lies the benefit of you reading ML-Implode and the Mr Mortgage blog as your first source of mortgage and housing related information.
NY TIMES STORY QUOTES –
“The program “is so much of a failure that it’s really unbelievable,” said Daniel M. Shlufman, president of the FCMC Mortgage Corporation in Clifton”
““We’re getting some benefit but not as much as I’d hoped,” said Representative Barney Frank”
” “It’s a complete joke,” said Jose Lemus, president of Brymus Capital”
“the interest rates on them remain prohibitively high, said prospective borrowers, like Nathan Menaged”
4/30 NY TIMES STORY LINK
Now, the big guns have come out to weigh in. Today, Bloomberg released a detailed story on just how little demand there is for these products and how Fannie and Freddie are actually spending their new-found expanded capacity buying their own mortgage securities. This was supposed to go into the front lines of the housing crisis. This wasn’t part of the deal.
It is apparent that Fannie and Freddie and those who approved these new provisions are only concerned with saving their own skins and those that own their bonds such as Bill Gross (who basically called for a self-interested bail-out a few months ago). Pumping $10s of billions into the agency MBS market may also provide false support and marks on agency MBS prices. If they are providing price support for their own securities and suddenly have to stop the agency MBS market mistakenly thought to be very safe, could suffer a severe dislocation like we have seen with most other mortgage-related securities. Remember, these securities are not backed by the Government other than $4.5bb total by the Treasury, they are backed by Fannie and Freddie.
Once again, this entire “Con-Jumbo” deal and expanded agency capacity looks like another financial sector bailout. I knew this smelled rotten from the get-go. – Best Mr Mortgage
June 24 (Bloomberg) — Story highlights…
Three months after Fannie Maeand Freddie Mac won the freedom to step up home-loan purchases, the government-chartered mortgage-finance companies are doing what critics in the Federal Reserve and Congress had predicted.
The $168 billion fiscal-stimulus bill signed by President George W. Bush on Feb. 13 temporarily allowed Fannie Mae and Freddie Mac to buy jumbo loans in 91 of the most expensive U.S. housing markets.
The increased lending power, combined with an agreement to reduce the companies’ capital requirements, are part of congressional efforts to revive housing starts and the economy following restrictions placed on the companies two years ago.
Instead of using powers granted by Congress to buy jumbo loans for the first time, Freddie Macand Fannie Mae are purchasing their own mortgage-backed securities, helping reduce losses, company filings show.
Since the rule change took effect in March, Fannie Mae has packaged $24 million of jumbo loans into securities, while Freddie Mac added $220 million, according to the Inside Mortgage Finance newsletter. In April, the companies spent more than $32.4 billion to buy their own instruments, regulatory filings show.
“They were granted expanded opportunity to help recovery in a troubled housing market and yet have appeared to focus on their own recovery, The change places taxpayers at greater risk without facilitating the policy goals I believe the Congress had in mind when they eased these portfolio limits,” said former U.S. Representative Richard Baker,
“Had they been quicker into the marketplace, they could have helped slow the downward spiral in housing prices,” Jerry Howard, president of the National Association of Home Builders, said.
The National Association of Realtors estimated last year that Fannie Mae and Freddie Mac would buy $150 billion of jumbo loans in 2008. UBS AG analysts now say the amount may be $74 billion; the companies’ own projections indicate that they may not even reach that figure.
Fannie Mae added $4.05 billion in net purchases of its mortgage-backed securities in April, taking its portfolio to $728.4 billion, according to company filings. Freddie Mac net purchases were $28.4 billion, bringing holdings to $737.5 billion, filings show. Buying existing debt may help prop up prices for the companies’ instruments.
For a loan of more than $417,000, Fannie Maeand Freddie Mac require a minimum down payment of 10 percent and a credit score of 660. That compares with 3 percent and 580 for loans under $417,000 at Fannie Mae; and 5 percent, with no minimum score, at Freddie Mac. The rankings, which range from 300 to 850, are used by lenders to predict whether a borrower will repay.
“Fannie and Freddie are catering to low-risk homeowners with high credit scores and a lot of equity in their homes,” said Dan Green, a loan broker at Mobium Mortgage Group Inc. in Cincinnati and Chicago. “I’m sure there will be some high-cost areas in the country that will benefit. They just don’t happen to be Florida, Michigan, California, Nevada.”
Jumbo loans bought by Fannie Mae and Freddie Mac carry an interest rate of 6.59 percent, more than a percentage point below regular jumbo rates of 7.68 percent, according to HSH Associates. Los Angeles borrowers are paying an average 7.87 percent, while Miami mortgage seekers are being charged 8.03 percent, indicating that few loans with low rates from Fannie Mae and Freddie Mac are being offered, according to HSH.
The companies’ purchases of their own securities are making them riskier because they retain 100 percent of the credit and interest-rate exposure on those assets, said William Poole, president of the St. Louis Federal Reserve until March and now a senior fellow at the Cato Institute.
“Any legislation today that simply expands what they do is going in the wrong direction,” Poole, 71, said. “It’s potentially digging the taxpayer in deeper.”
Last Updated: June 24, 2008 15:12 EDT