“Jumbo” Loan Increase May Not Stem Housing Decline (Update1)

By David M. Levitt
Bloomberg

A congressional plan to let Fannie Mae and Freddie Mac insure larger mortgages may not be enough to reverse the U.S. housing market slide, said Nishu Sood, a homebuilding analyst with Deutsche Bank Securities.

Congress yesterday passed a $168 billion economic stimulus package to head off a recession. The bill will allow Fannie and Freddie to raise the limit on purchasing “jumbo” loans to $729,750 from $417,000. Mortgages will be eligible if they were granted between July 2007 and Dec. 31, 2008.

“The headlines are more exciting than the potential for real impact,” Sood wrote in a research note yesterday. “Not only do the proposals have limited reach and a short timeframe, but also qualification standards could limit the number of buyers that could benefit.”

Mortgage lending will fall to an eight-year low this year as home prices continue to drop, the Mortgage Bankers Association projected last month. Record foreclosures, lax lending standards and speculation have contributed to the worst drop in home sales on record.

Supporters of higher loan limits said the plan will help struggling homeowners finance larger mortgages at lower interest rates, especially in expensive metropolitan areas such as New York , Washington and Southern California , where median home prices now exceed the $417,000 limit.

Markets Get Help

The bill would also allow the Federal Housing Administration to insure loans up to the same $729,750 limit. President George W. Bush said today he will sign the bill next week.

The measure may only help buyers in the most expensive markets. In only eight markets, including the metro areas of New York , Boston , Los Angeles-Orange County, San Jose-Santa Clara in California , and Washington , are prices high enough for the rise in loan limits to have an impact, according to Deutsche Bank.

The San Jose-Santa Clara area, home of Silicon Valley, had the U.S. ‘s highest median existing home price, $852,500, in the third quarter, according to the National Association of Realtors.

No Help for Las Vegas

The study found only marginal impact in Miami , Sacramento , California , and the California ‘s Inland Empire region. It found no impact in Phoenix , Las Vegas , Chicago and most major Southern markets, including Houston and Dallas.

Less than 10 percent of the markets of the biggest publicly traded homebuilding companies, such as Toll Brothers Inc., NVR Inc. and Hovnanian Enterprises Inc., will benefit from increase, Deutsche Bank found.

More than 80 percent of the property owners who sought to refinance through Prime Rate Funding in the last three months were unable to do so because their home’s value had dropped, said David Pearl, the mortgage director of Prime Rate Funding Group Inc., a Timonium, Maryland-based brokerage that serves homeowners in Maryland , Pennsylvania , Virginia and Delaware .

“As far as refinances go, the issue is even with raising those loan limits, people are tapped out on their equity, so it may not make a difference from the point of getting out of their existing situations,” said Kevin Henneman, branch manager of Prime Rate Funding.

Congress created Fannie Mae and Freddie Mac to increase mortgage financing by buying loans from lenders. A jumbo loan is any mortgage in excess of $417,000. The publicly traded companies profit by holding mortgages and mortgage bonds as investments and by charging a fee to guarantee and package loans as securities. When defaults rise, they record losses.

Good Credit

Most people buying homes that require jumbo mortgages have good credit and can get those loans from commercial lenders, said Billy Keyserling, a broker with Coldwell Banker Platinum in Beaufort , South Carolina .

“Seventy percent of our market is people with a budget of $300,000 and below,” he said. “For every 30 of those houses we list, we have 70 buyers. Once we go over about $275,000 we are just knocking people out of the opportunity to buy a home.

“This is something that’s going to help wealthy people and banks but it’s not going to help working people.”

The federal change should help stimulate the mortgage market in New York , New Jersey and Connecticut , said Melissa Cohn, president of Manhattan Mortgage Co., which arranges home loans in those states.

“In Manhattan where the average price is $1.3 million, it’s not going to have a tremendous impact, but in the outer boroughs, New Jersey, Connecticut and the suburbs of New York it will have a great impact,” she said. “It will probably impact about 20 percent of my clientele, and that’s a big number.”

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