by Tanta on 3/12/2008 11:45:00 AM

Well, this is interesting. The GSEs have decided to compete with each other.

I summarized Fannie Mae's conforming jumbo guidelines here. The Freddie guidelines just published have some substantial differences:

1. Freddie is accepting 40-year fixed as well as 30-year fixed with a 10-year IO (Interest Only) term. Fannie is 30-year only and no fixed-rate IO.

2. Freddie is allowing cash-out refis on principal residences only, with a maximum LTV of 75%, a minimum FICO of 720, and a maximum disbursed cash limit of $100,000. All cash-outs get a 1.00% fee hit.

3. Freddie is allowing a maximum LTV/CLTV for purchases of 90% on an ARM; Fannie allows 90% only on FRMs. Freddie's FICO requirements are slightly tighter.

4. Freddie will allow loans to be approved through Loan Prospector (its automated underwriting system), and will therefore allow "Accept Plus" documentation. (If the loan is underwritten without LP, it requires standard full doc.) "Accept Plus" allows partially-verified income for salaried borrowers and stated income for self-employed borrowers. Loans receive "Accept Plus" eligibility based on LP's internal evaluation of the entire loan file; it cannot be used with non-LP loans. Fannie is not allowing AUS and requiring full doc on all loans (so far).

5. Freddie's base fee adjustments are like Fannie's, .25 for a fixed and .75 for an ARM. Besides the cash-out adjustments, Freddie is also charging an additional .50 for no-cash-out refinances.

6. Otherwise the guidelines are essentially similar.

I know I promised to make some estimates of origination volume of the LFKAJ, but every damned time I think I've got all the data, it just gets more interesting.

by Tanta on 3/11/2008 06:02:00 PM

UPDATED BELOW

Or whatever it is you guys are. The sort who become fascinated by weird housing-related data. The sort with good researching abilities. The sort with a surprising amount of time to kill given your apparent educational background and skill levels. You know, UberNerds.

I was spending some time today with the official list of counties that are subject to the new higher jumbo-conforming loan limits. All the usual suspects are on there, plus a few surprises. Like, Athens County, Ohio.

What is Athens County, Ohio doing on this list? It's the only county in Ohio to make the list, which given Ohio's hideous RE market conditions, isn't that surprising. But why did this county--which is not even a metropolitan area (it's a "micro area")--become the highest-cost county in Ohio, loan-limit-wise? The new conforming loan limit for Athens County is $432,500. I'm having a hard time finding data on median home prices in Athens County--since it isn't even an MSA--but I do see that, according to the Ohio Association of Realtors, the average price of homes sold in December of 2007 was $111,891. The highest average current listing price I found on a real estate site was $158,000. I could only find a handful of listings over $400,000. Because the new jumbo-conforming limits are supposed to be 125% of area median prices, that implies a median price for Athens County, Ohio of $346,000.

I hasten to add I have nothing against Athens County, Ohio. I'm sure it's a very nice place. But can anyone tell me what they're smoking at HUD? Does somebody with some important political connections live in Athens County? Was the median price calculated on more than two home sales? Help me out here, Nerds.

UPDATE: Ponder this (source):

(Thanks, JKB!)

by Tanta on 3/07/2008 08:31:00 AM

Are here from Fannie Mae. I must say I am really surprised. This level of speed has "political pressure" written all over it.

The details:

1. Fixed rates can be sold to Fannie on or after April 1; ARMs on or after May 1. The loan has to be closed on or after March 1 to be subject to the following rules; inventory loans (closed from last July to March) have to be subject to a "negotiated commitment."

2. No AUS approvals. It seems they plan to update Desktop Underwriter (their automated underwriting system) before the year is out, but they haven't done so yet and they're rollin' without it.

3. For principal residences, fixed-rate loans are limited to 90% LTV/CLTV for a purchase, and 75% LTV/95% CLTV for a no-cash-out refi. ARMs are limited to 80%/80% on a purchase and 75%/90% on a no-cash-out refi. CASH OUT REFIS ARE NOT ALLOWED.

4. For second homes and investment properties, the maximum LTV/CLTV is 60% in all cases for purchases and no-cash-out refis.

5. Minimum FICO for any loan is 660, with a minimum of 700 for LTVs greater than 80%.

6. One-unit properties only.

7. On a primary residence, existing subordinate liens must be resubordinated. The new loan cannot "cash out" an existing subordinate lien.

8. No late mortgage payments in the preceding 12 months.

9. 45% maximum DTI, with ARMs qualified at fully-amortizing fully-indexed rate.

10. Full doc only.

11. For purchases, the borrower must make at least 5% of the down payment from his or her own funds.

12. A full appraisal with interior inspection is required on all loans; if the property value is more than $1 million, a field review appraisal is also required.

13. Loans are subject to all current pricing adjustments, plus another .25 for FRMs and .75 for ARMs.

It was kind of fun to type all that; it reminds me of all the jumbo loan guidelines I used to write in the 90s.

by Tanta on 3/07/2008 06:18:00 AM

I will have you know I did not make that up. I made up "Loans Formerly Known as Jumbo" or LFKAJ. But the OFHEO press release actually says "temporary jumbo conforming loan limits." TJC it is.

So, TJCs are here. Specifically, the loan balance limits are here. No word yet on what delightful LTV the GSEs will cap them at, or when such information will be available.

Many more MSAs are impacted than I originally predicted. I guess the time HUD put into establishing a brand-new home price model was well spent.

New limits by MSA are here.

by Tanta on 2/16/2008 12:28:00 PM

As you all know, the stimulus bill just passed raises the statutory conforming loan limit from its current $417,000 in all states (except Alaska and Hawaii) to a new variable limit, equal to the greater of the current limit or 125% of the area median home price, with a maximum of 175% of the current limit ($729,750). The new limit expires on 12/31/08, and is retroactive to July 1, 2007 (meaning that some jumbo loans closed by lenders from July 1 to passage of the new limit would be eligible for sale to the GSEs). This was supposed to kick-start the jumbo mortgage market and bring the spread between jumbo and conforming rates down.

So what's happenin'?

1. We do not yet know exactly what the new limits will be for affected areas, or even exactly how many areas are affected. The bill gives HUD the responsibility for defining and publishing the median home prices for purposes of establishing the new conforming limits, but many people do not realize that HUD has never published its own home price indices before. Will it use OFHEO data? NAR? Federal Housing Finance Board? Some combination thereof? Is an "area" an MSA or a county? We don't know; that's undoubtedly why HUD was given 30 days from enactment of the law to come up with the relevant numbers. My guess is they'll be using every one of those 30 days to work this out.

2. The bill does not require the GSEs to purchase the new higher-balance loans at the same terms currently in place for $417,000 loans. If they did offer the same loan parameters, that would mean--in theory at least--that the new LFKAJ could be made as high as 95% LTV/CLTV. However, a 95% LTV loan would require mortgage insurance. As a general rule, the MIs mostly limit purchase loans over $650,000** to 90% LTV. So unless the MIs relax their rules--which would surprise me--there wouldn't be a lot of point in the GSEs setting a maximum LTV that cannot qualify for the required MI. Realistically, the GSEs will have a lot of work to do hashing out what the allowable guidelines are for these loans, which will involve a lot of discussions with the MIs. As OFHEO Director Lockhart has been signalling nothing but disapproval of the whole thing since the idea was first floated, it is surely certain that any proposal the GSEs come up with will involve review and possibly negotiation with OFHEO. Plus, the GSEs have to update their AUS (automated underwriting), their pricing and delivery systems, and their selling and servicing guides to accommodate the new rules. You can confidently expect this to take a while.

3. Lenders will have their own systems and policy and pricing work to do once they know what the GSEs will accept. Doug Duncan of the MBA estimates this will take three to six months. There's a lot involved there, particularly in the pricing engines, but to give you a simple example: loan processing systems currently are programmed to validate the maximum loan amount on a conventional conforming loan simply by looking at the property state (AK/HI or not) and number of units (the limits are higher for 2-4 unit properties). Somebody will have to change that to MSA or county code, and build the new tables for the new dollar amounts. If I know my industry, this part of the process alone will require ten Gantt Charts, two task forces, thirteen meetings, seventeen dry-erase markers, four new white boards, and eleventy-jillion budget dollars allocated to IT consultants per lender. On the conservative side. The "stimulus" to IT investment will outweigh the mortgage dollars put into circulation by a factor of probably five, but hey! Stimulus is stimulus. If it turns out that the layoffs in the back room we've been hearing about for the last year included too many of the people who understand how the systems interface, multiply by five. (Do I sound jaded about how long it takes a huge corporation to turn on a dime once it has overloaded itself with multiply-interfacing automated systems and laid off too many cubicle dwellers? So I sound jaded. So does the MBA with this three to six month estimate.)

4. SIFMA has already announced that these LFKAJ won't be allowed in TBA pools. The short version of that: this pipeline will have to be segregated from the CCNJC*** and priced as "specified pools." Housing Wire found a market participant who speaks the language: “Jumbo borrowers [will] only get the benefit of guarantee in market, while the prepayment hickey and higher GSE guarantee fees are tacked onto their rate.” I assume this source is a Wall Streeter; on Main Street mortgage desks I think it's called a "prepayment ding." (Brokers, who are complete amateurs about pricing, will uniformly call it a "bump.") Bottom line: it's going to take a while for everybody involved to put a price on this stuff, and some folks may not be very happy when they find out what that price is.

5. Somebody has to name these things responsibly. I can't keep typing LFKAJ. I warn everyone involved, however, that if you decide on "super duper conforming" I will ridicule you to my dying day.

6. By the time all these ducks get into a row, it will be mid-year at best and a fair amount of money will have been spent invested. It will be considered a shame to have done all of that to originate LFKAJ for maybe two quarters. The suggestion that we just go ahead and make this permanent will be made approximately ten minutes after the first trade settles (at the outside).

7. Making it permanent will involve the same problem that the now old-fashioned conforming limit calculation had: what do you do if the average home priced used in the calculation drops? The $417,000 limit is already a touch overdue for a reduction, and heretofore everyone's expectation was that it would be lowered for 2009. (That issue will arise when the third-quarter national home price data is available in November.) If HUD doesn't choose a home price data source for the new "temporary" limits that is the same as the data source used for the "permanent" limits (which is the FHFB MIRS October price), we could be looking forward to some real fun with duelling spreadsheets later this year.

8. In five or six years, if CR and I haven't yet retired on the fabulous earnings we get from blogging, we will be fielding questions from frustrated readers that go like this: "Why were these bizarro variable area-level conforming limits designed like this? Why are these formulas so complicated?" Fortunately, we'll just be able to repost oldies out of the archives to explain that whatever conforming regime we're living under in the future wasn't, actually, "designed." It just "happened" because that was how the programmers solved the system validation constraints in mid-2008 in the middle of a credit crisis. We will be called "cynical" by people who refuse to believe that things actually happen that way, and will be sent links to academic papers from whip-smart young economic theorists who will demonstrate how the conforming loan limits constitute optimal market efficiency.

-----------------------------------

*Loans Formerly Known as Jumbo

**Those quaint old mortgage insurers still use the term "super jumbo" to refer to loans over $650,000. Now that there are super jumbos that just became "conforming" overnight, many elves will have to be busy revising many documents.

***Conforming Conforming, Not Jumbo Conforming

by Tanta on 2/08/2008 01:23:00 PM

WASHINGTON, Feb 08, 2008 /PRNewswire-USNewswire via COMTEX/ -- The National Association of Realtors congratulated the U.S. Congress for quickly passing a national economic stimulus package and thanked President George W. Bush for his leadership and willingness to promptly enact legislation that will help thousands of families, the housing market, and the U.S. economy.

"We believe the economic stimulus bill that Congress sent to the president today is strong legislation that will quickly impact the nation's families and economy," said NAR President Richard Gaylord, a broker with RE/MAX Real Estate Specialists in Long Beach, Calif. "We are pleased that both the Federal Housing Administration (FHA) and the Fannie Mae and Freddie Mac (GSE) loan limits have been increased, even if only temporarily. This will be a major stimulus for the housing industry and for people who want to own a home."

Increasing FHA loan limits will help an additional 138,000 Americans achieve the dream of homeownership and will allow nearly 200,000 homeowners to refinance and potentially keep their home, according to NAR research. . . .

An economic impact study conducted by NAR earlier this month estimated that increasing the GSEs' conforming loan limits would result in as many as 500,000 refinanced loans and could help reduce foreclosures by as much as 210,000. In addition, over 300,000 additional home sales could be generated, housing inventory would be reduced and home prices would be strengthened by two to three percentage points. "These are real results and will have an immediate and sustainable impact for families across our country," said Gaylord.

I'm posting the text of this only so that when we go back and do the numbers at the end of 2008 and see that NAR's estimates for GSE refis and purchases were off by about an order of magnitude, we don't have to worry about the link to the original PR having disappeared from the toobz.

I'm hesitating, by the way, to make my own estimates of potential additional refis and sales transactions under the new GSE conforming limits, since we don't yet know what guidelines the GSEs will use for the larger loans (especially but not limited to maximum LTV/CLTV and mortgage payment history); we don't know when the GSEs will announce these standards so that lenders may begin taking applications, and we don't know how the things will be pooled or guarantee fees set, which will definitely impact the rate offered and hence the motivation for existing jumbos to refinance. And until those announcements are made, we won't know how many months of 2008 will be left. That said, I will go on record as being stunned and surprised if we see more than half of NAR's dreams come true.

by Tanta on 2/07/2008 10:36:00 AM

Seems like a fair request to me. This is from OFHEO Director James Lockhart's testimony to the Senate Banking Committee, link brought to you by the indefatigable and industrious bacon dreamz:

The GSEs have become the dominant funding mechanism for the entire mortgage system in these troubling times. They are fulfilling their missions of providing liquidity, stability, and affordability to the mortgage markets. In doing so, they have been reducing risks in the market, but concentrating mortgage risks on themselves. . . .

The risks are beginning to take their toll. Public disclosures indicate that Freddie Mac will report annual losses for the first time in its history and Fannie Mae for the first time in 22 years. Their missions, as well as Congressional and many other pressures, are demanding that they do more and take on more risks in areas new to them – subprime and jumbo mortgages. As the safety and soundness regulator of Fannie Mae and Freddie Mac, I have to tell you that expansion of their activities would be imprudent unless the regulator has significantly more powers and more flexibility to use those powers. Given the tremendous stresses on the mortgage markets, the American people cannot afford to have Fannie Mae, Freddie Mac, or the 12 FHLBanks incapable of serving their mission. . . .

In 2006, Fannie Mae and Freddie Mac were losing market share to Wall Street private label MBS (PLS). There is a certain irony that one of the ways they prevented their market share from falling even farther was that they became the biggest buyers of the AAA tranches subprime and Alt-A of these PLS. The Enterprises’ earlier problems, OFHEO’s constraints, and the loose underwriting standards in the market made it hard for them to compete. Some observers even suggested that, due to shrinking of market share, their support of, and therefore their risk to, the mortgage market were no longer relevant.

In the last half of 2007, the PLS world shrunk to minimal levels as a result of a long list of well reported problems. As a result, even with the OFHEO constraints, Fannie Mae and Freddie Mac mortgage purchases as a share of new originations grew to unforeseen levels, rising from less than 38 percent in 2006 to over 60 percent in the third quarter of 2007. The just reported fourth quarter results of 75.6 percent are double 2006’s market share. If you add in the net increase in outstanding FHLBank advances, especially in the third quarter, the combined market share of the housing GSEs may be 90 percent. . . .

Another related change over the period was the growth of credit risk. Operational risk and to a lesser extent market risk had been the key focuses of the Enterprises and they still are extremely important with the volatility of the markets and heavy reliance on models for market and credit risk pricing. I remember listing credit risk concerns in an early presentation I did to one of their Boards. Some members were mystified that I thought it was an issue given their track record. I am afraid that was a sign of the times.

The Enterprises were then reporting credit losses of 1 to 2 basis points, a third of normal levels and now they are approaching double normal levels and climbing. Some of this growth in losses was because they lowered underwriting standards in late 2005, 2006, and the first half of 2007 by buying more non-traditional mortgages to retain market share and compete in the affordable market. They also have very large counterparty risks including seller/servicers, mortgage insurers, bond insurers and derivative issuers.

Basis points sound small, but they become important when you are leveraged the way Fannie Mae and Freddie Mac are . . .

Now, I will turn to the temporary increase in the Conforming Loan Limit (CLL) as proposed in the Economic Stimulus package. OFHEO believes any increase in the CLL should be coupled with quick enactment of comprehensive GSE reform. The CLL provision in the stimulus package would increase the Enterprises risks by allowing them to enter the “jumbo” loan market. It would increase the maximum size loan those GSEs could purchase or guarantee from $417,000, to the lower of 125 percent of median area prices or $730,000, for mortgages originated between July 1, 2007 and December 31, 2008. This change should help lower interest rates on some jumbo mortgages, but other potential implications deserve attention.

Jumbo loans would present new risks to the already challenged GSEs. The prepayment and credit risks are different than those of conforming loans. The provision also pushes the GSEs to increase their geographic concentration in some of the riskiest real estate markets. Roughly half of all jumbos are in California. Underwriting them successfully will require new models and systems to ensure safe and sound implementation. Capital also would present challenges even if all newly conforming mortgages are securitized. A $600,000 loan requires as much capital as three $200,000 loans. . .

by Tanta on 1/25/2008 06:06:00 PM

This probably wasn't what Congress had in mind, ya think?

NEW YORK (Reuters) - A key element of the stimulus package aimed at jump-starting the ailing U.S. housing market may have the unintended consequence of raising mortgage rates, said analysts studying the plan.

A federal proposal to increase the size limit on loans eligible for purchase by mortgage finance giants Fannie Mae and Freddie Mac has unsettled traders in the $4.5 trillion market for bonds backed by the "conforming" mortgages.

Increasing the eligible loans to $729,750 from $417,000 would change the characteristics of mortgage-backed securities, leading traders to exact a premium for increased interest-rate risk.

Borrowers with large, jumbo loans are more likely to refinance since their savings are greater for each incremental drop in rates than for a smaller loan. The loans will taint the bonds since traders don't initially know the make-up of the securities known as "agency" MBS.

Higher mortgage rates would make it even harder to unload already high housing inventories and existing homes on the market, delaying any housing recovery and potentially extending the U.S. economic slowdown.

Potential damage to the "to-be-delivered" (TBA) market -- the most actively traded agency mortgage market where investors can buy bonds before they are actually created -- prompted Wall Street dealers to call a special meeting with the Securities Industry and Financial Markets Association at 3:30 p.m. Friday, market sources said. A SIFMA spokeswoman would only say the group is in ongoing discussions with its members.

"The amount of money that investors are willing to pay for agency mortgages (bonds) could be lower if these loans are TBA deliverable and so mortgage spreads could widen," said Ajay Rajadhyaksha, co-head of U.S. fixed income strategy at Barclays Capital in New York, who will listen to the SIFMA meeting by phone.

Mortgage rates would rise for the "vast majority" of agency-eligible borrowers, he said.

When falling rates prompt refinancing of loans in mortgage bonds, investors can be hurt since principal may be returned to them at a price below market value. The investor is also faced with reinvesting principal in bonds paying lower rates.

MBS paying low interest rates have been hurt in recent days amid expectations the addition of many jumbo loans will boost supply in those coupons, analysts said. As much as $500 billion in jumbo loans could qualify, according to Barclays research.

Wall Street MBS traders last beat down SIFMA's door in October when the advent of the Federal Housing Administration's FHA Secure program threatened to taint TBA pools of Ginnie Mae securities. The dealers got their way -- Ginnie Mae created new "specified" pools outside of their TBA issues for FHA Secure.

"The street is on high alert," one mortgage trader at a New York-based primary dealer said in an e-mail.

Rajadhyaksha and other analysts, including RBS Greenwich Capital's Noah Estrin, expect the TBA market will be protected if Congress and President George W. Bush approve the stimulus plan as written.

"When you start throwing a lot of jumbos into a pool you spoil the fungibility of the collateral," said Linda Lowell, a mortgage market veteran and principal of Offstreet Research LLC. "That has made the market as liquid as it is. Home owners have benefited from lower mortgage rates."

TBA works the way it does precisely because "agency" loans are basically interchangeable: the normal variation just isn't wide enough to prevent traders from pricing deals before seeing the exact loan composition.

Certainly this problem can be solved by putting the LFKAJ* in their own pools--as with FHASecure. That might keep this plan from driving up rates for everybody, but it's not clear to me how it improves the spread on those LFKAJ-only pools. Hmmm.

*Loans Formerly Known as Jumbo