Congress has raised the jumbo limit for Federal Housing Administration (FHA) loans back to $729,750 just one month after the loan limit increase expired in October 2011. The limit on Fannie Mae- and Freddie Mac-backed loans, however, is not set to be increased and will remain at $625,500.
In related news, jumbo loan borrowers pose a greater risk of strategic default than any other type of borrower, according to a recent report from Moody’s Analytics.
In other related news, the FHA will soon require a taxpayer bailout. [For a full report on the anticipated FHA taxpayer bailout, see the November 2011 first tuesday article, Federal Housing Administration bailout just around the corner.]
first tuesday take: An FHA trifecta of impending doom.
Congress must be pretty confident that prices will not drop more than 3.5% over the short term. Given related news, we can’t figure out where this confidence comes from. The FHA is on the brink of a taxpayer bailout, Moody’s has heralded an imminent wave of strategic defaults on jumbo loans and by our account prices have a couple of years yet to fully bottom out. [For our projection of the market’s bottom, see the October 2010 first tuesday article, The equilibrium trend line: the mean-price anchor.]
Congress properly raised the jumbo loan limit in 2008 to provide buoyancy to a rapidly sinking housing market that was in danger of long-term stagnation. Today, we bear witness to the result. Thousands more qualified for jumbo loans at 3.5% down in 2008 and continued watching prices plummet all the way to the present day. Those who had a 96.5% loan-to-value ratio (LTV) in 2008 now enjoy a 125% LTV (if they are lucky) just like their reckless forebears from the Millennium Boom.
In fact, increasing the FHA’s jumbo loan limit signals congressional uncertainty in the housing market. It is another example of a panicky, short-sighted move by a Congress that is beholden to the interests of lenders and the real estate trade union. Should anyone in an unstable market environment such as ours be able to finance a home priced at nearly a million dollars with only 3.5% down?
Haven’t we learned our lesson that this lack of skin in the game is unsustainable and only serves to increase fees for lenders and realtors in the short term, resulting in strategic defaults and foreclosures in the long term? [For information on sustainable lending solutions, see the October 2011 first tuesday article, The 20% solution: personal savings rates and homeownership.]
But the name of the game is appearance. This move will keep up the appearance of stable prices and the appearance of home sales volume, it will keep lenders and realtors happy as they collect fees on jumbo loans, but it will not make a real impact on prices and sales volume for the long term. We see the evidence of this fact in the current predicament that the FHA faces today.
Once again, aided by an ideological government housing policy, the architects of the real estate market continue to extend and pretend.
re: “Jumbo mortgage holders pose highest risk of default” and “Higher FHA loan limits reinstated for high-cost housing markets” from the New York Times
You people are unbelievable.
Ellen still thinks Bush/Cheney are in the White House, and the rest of you are deeply concerned about the small portion of FHA loans that actually hit the over-$700k mark, as if that’s the market at the greatest risk. You’ve just bought into to this raging liberal author’s misinformed, never-worked-a-day-in-his-life-in-real-estate-or lending hyperbole.
3.5% down on a $729,750 home is still more than $25,000 people. Get your calculators out before you stop typing. Compare that to the OVERWHELMING majority of FHA loans less than the conforming loan limit, which is where the bulk of your foreclosures, REOs and short sales come from.
Someone who can afford the PITI and MI payment on a loan over $705,000 is in a different league altogether compared to the guy buying a $150,000 home with FHA-insured lending. He only needs less than $5000 to get approved, AND he’s upside-down in the property SOONER, and at greater risk of default thanks to his blue collar job than anyone buying a home in the $700,000 bracket.
The culprit here is FHA itself. Guidelines need to be amended to eliminate 100% “Gift Funds” from an immediate relative — borrowers should be forced to prove that the down payment is from their own earnings or assets exclusively. Using someone else’s money for down payment is the surest recipe for a default.
The next thing that needs to be curtailed is the stupid 3.5% down — that needs to be 10% for FHA and 20% for Fannie/Freddie. All of these homes are going to be upside-down anyway — this isn’t an equity issue. The point is what is it going to take for people to stop with the walking away from homes and contributing to the ongoing crisis. If you believe these idiot publications and authors like this one, they think homeownership is a God-given right that you have until you can’t afford it anymore, after which your default is the “government’s” problem. Bunch of communists these people are.
The final thing that FHA needs to amend is this acceptance of credit scores as low as 620 — that’s nothing but BAD credit by today’s standards, yet thousands of FHA-insured loans are underwritten as the new de facto subprime product every week across this country.
So let’s see — today’s FHA loan allows ridiculously leveraged financing, no vested minimum equity from the buyer, and subprime credit allowances. Hmmm….Barak Obama has been president now for 3 years and the system is different or better HOW again???
As a real estate broker I received several requests from CAR ( realtors association) to contact my senators and congressperson to increase the FHA and the FNMA and FDMC limits. I never did so as I agree with Mike from San Diego that the limits should be lowered. this should be done gradually over time. FHA loans shoud be limited to folks with limited income. The rest of us should should get our financing in an open, non taxpayer subsidized or gauranteed, market.
AMEN! i remember telling a friend that the FHA should LOWER their loan limits, not raise them. i can’t think of a better way to guarantee future losses than to enable more folks to borrow more money and still not requiring them to have some real skin in the game. the FHA has a long history of making low down payment loans to types that qualify for them. if you can qualify for a $729k loan you don’t need the assistance of ANY arm of the government.
even a raging Libertarian like me can agree that the FHA is a fine product that has a place in the scheme of things but it is FRIKKIN RIDICULOUS to endorse low down payment loans for nearly THREE QUARTERS OF A MILLION DOLLARS.
does no one else see the insanity?
@Ellen S.
Correct spelling:
The word ‘vowel’ is spelled as I have just demonstrated. There is only one ‘L’ in that word. Please use correct English/American spelling when you complain about someone’s grammar.
Bad
Anything less than 20% down is crazy…in my opinion no matter our FICO score, income or other factors. -even when we are not in a recession.
There would have been lots of upside down homeowners even with that as a down payment.
Not quite.
The word “an” is not used before vowels (Note: vowel with one “L”).
The word “an” is used before words that begin with a vowel sound.
For example, “What is a ewe?” demonstrates correct usage of the word “a” before a word beginning with a vowel. “There was an honorable judge in attendance,” reveals correct usage of the word “an” before a word beginning with a consonant.
And “a” is used when a word makes the “w” sound (like the word “one”). Not the other way around.
Correct grammar:
“an” is used before a vowell, i.e., a, e, i, o, u and sometimes w and y.
“a” is used before all consonants.
Please set an example and use correct English/American grammar.
Ellen
Gee, it appears Newt the “puke,” the “consultant”–not a full-fledged LOBBYIST–may have something to do with this fraudulent perpertaration on the American taxpaying public.
Long live the Republicans, the 0.5% of the American public. Thank goodness, corporations, enjoying the status as an “individual” can’t vote.
Oops, maybe shouldn’t even have suggested that option. Bush, Cheney and Rumsfeld may get some idea on how to further influence our corrupt Congress, White House and Supreme Court.
The U.S. political system is more corrupt than any other country criticized by the U.S. media.
Heaven help the American people.Congratulations Republicans–your presidential Nominee is a LOBBYIST for FREDDIEMAC, closely allied with FANNIEMAE. Can’t wait to see how his lobbying association with FHA
Ellen