Thawing the jumbo loan freeze

While California stands to benefit disproportionately from a Congressional plan to lower costs for jumbo loans, it still won't help everyone. From a Wall Street Journal article:

As part of a broader economic-stimulus package, lawmakers are considering allowing Fannie Mae and Freddie Mac to purchase or guarantee mortgages larger than $417,000, the current cutoff for conforming loans. That in turn is expected to encourage lenders to charge lower rates on the larger loans, because the loans would have the implicit backing of the federal government. The pending legislation would temporarily boost the cap for Fannie and Freddie to as much as $729,750, especially in places like California and along the East Coast where housing prices are much higher than the national average. The new caps would be based on the median home price in certain areas, rather than the current flat national cap...

But mortgage experts caution that the benefits of lower interest rates on certain jumbo loans could be tempered by various factors. Additional fees could be imposed on the loans to compensate for added risk, pushing up their cost to consumers. And the temporary fix is scheduled to expire at the end of this year, offering only a narrow window for borrowers unless that date is extended. What's more, lower rates won't be of much help to homeowners interested in refinancing if their house is now worth less than the size of their mortgage...

In California, hard hit by the housing downturn, legislators and mortgage-industry trade groups have long supported lifting lending caps to stimulate the state's economy. "The [$729,750] ceiling will give more of an economic shot in the arm than any one-time tax rebate will," says Mitchell Reiner, president of Mortgage Capital Associates, a Los Angeles lender. The state's median home price is more than $450,000, meaning many homeowners aren't currently able to get conforming mortgages...

The Senate is still squabbling over other aspects of the economic-stimulus bill, but congressional insiders say it is all but certain to accept the House provisions on Fannie and Freddie. The pending legislation would affect loans in communities where the price of a median house -- the one smack in the middle of the statistical range -- exceeds $334,000. In those places, the new limit would be 25% higher than the median price, but in no case higher than $729,750.

Based on the latest Federal Housing Finance Board data, likely beneficiaries will be borrowers in much of California, including the San Francisco, San Jose, Los Angeles and San Diego areas. Other areas likely to benefit include Washington, D.C., and surrounding suburbs; New York City and areas from western Connecticut to northern New Jersey; the Boston area; and the area around Naples, Fla...

Fannie and Freddie also aren't saying how they plan to enforce the new rules. The companies have long sought to expand into the jumbo market. But they must set aside capital for every mortgage they own or guarantee, and neither is flush with capital. What's more, their chief regulator, the Office of Federal Housing Enterprise Oversight, isn't pleased with the pending legislation because of the additional risk the companies would shoulder.

Among other things, Fannie and Freddie, which already have boosted fees they charge for guaranteeing mortgages, could impose even higher fees to guarantee the bigger mortgages. The bill allows Fannie and Freddie "to be increasingly selective about what kind of business they choose to do and at what pricing," says Mr. Wasserstrom, the UBS analyst...

Another complication: The bill limits the new ceiling for Fannie and Freddie guarantees to mortgages originated between July 1, 2007, and Dec. 31, 2008. The 2007 date is intended to allow banks that hold jumbo mortgages on their books to sell them into the securities markets, presumably making them willing to originate more mortgages. The December expiration is a political compromise.

But the housing and mortgage industries say the expiration date -- which could be altered before the bill hits the president's desk -- could pose a big problem. Given the time needed 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, the number of mortgages that could actually benefit before Dec. 31 may be disappointingly small. "That's not enough time for them to make a significant enough contribution to the housing-finance sector to help pull us out of this downturn," says Jerry Howard, chief executive of the National Association of Home Builders, which is pressing Congress to make the provision last at least two years.

The new limits won't help people holding jumbo mortgages refinance into a lower cost loan if their homes are worth less than their existing mortgage. Jan Van Wynsberghe, president of Miracle Financial, a mortgage broker in Upland, Calif., says thousands of borrowers in Southern California's Inland Empire region, where her firm is located, have mortgages that exceed the value of homes, known as being upside down. "I had 10 clients call in January to request a refinancing, but I could help only one because the rest were upside down," she says.