The new ‘junior jumbo’ loans, and why they won’t be temporary
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Good morning. Countrywide Financial is leading the cheers this morning for the new ‘junior jumbo’ mortgage loan limits. ‘It’s the single most effective step they could take to stabilize the housing and mortgage market,’ said Countrywide spokesman Rick Simon.
The details: Simon was praising the stimulus deal cut by the administration and Congress, which would include ‘...a significant increase in the maximum loan limits for the Federal Housing Administration and quasi-governmental secondary mortgage operations best known as Fannie Mae and Freddie Mac.’
More, from LATimes.com: ‘The precise hike in loan limits was still being debated late Thursday. House Republicans said they had agreed to temporarily raise the limit for Fannie Mae and Freddie Mac loans to $625,500, although Democrats were proclaiming that the deal would hike limits to $729,750. Either way, the increased limit on loans guaranteed by Fannie Mae and Freddie Mac would be temporary, expiring Dec. 31 of this year.’
Why it’s such a big deal, and such a boost for homeowners, in California: The move would likely mean lower interest rates on loans in the $417,000 to $729,000 range (which I’ll now call ‘junior jumbo’ loans). That would help buyers in that price range, and owners in that price range who are looking to refinance into fixed-rate loans. Maybe more important, it helps lenders like Countrywide find a willing buyer for their junior jumbos. Win, win, win for those folks.
The arguments against higher limits: They would newly expose Freddie and Fannie -- and ultimately taxpayers -- to some of the least stable housing markets in America, which are the expensive ones. As Mike P said here yesterday, ‘In other words, taxpayers all across the country are now on the hook for California-sized mortgages. I bet they’re thrilled.’ Also: As Cal points our here, Fannie and Freddy’s limited capital ‘will be soaked up by California (and other parts of the country) Jumbos, leaving a lot less for everyone else.’ In other words, explain to someone in Cleveland why the government should back one big California mortgage instead of three normal-sized Ohio mortgages.
Why it won’t be temporary: Because on Dec. 31, 2008, it says here, the housing market in California and other bubble markets will still be weak. The lame-duck Congress will have a choice: let the junior jumbos expire, which would hurt already weak markets, or extend the junior jumbos. Congress, lame or otherwise, rarely crosses the financial industry. The junior jumbos will survive.
Why the Bush administration rolled over on this issue: Its opposition to higher loan limits for Fannie Mae and Freddie Mac is well known. From NYTimes.com: Treasury Secretary Paulson, at a news conference, acknowledged that he was not happy about the higher limits. “I got run down by a bipartisan steamroller,” he said. “Republicans and Democrats reunited on this.”
Your thoughts? Insights? Anybody out there believe these higher limits would be temporary? E-mail story tips to peter.viles@latimes.com.