Recently, the government raised the ceiling on the loans that can be purchased by Fannie Mae and Freddie Mac in an effort to help homeowners in pricy coastal zones. "Jumbo" loans, above the old ceiling of $417,000, carried a stiffer interest rate; the government hoped to ease the burden on those homeowners, and perhaps give a boost to the housing market.
Apparently, though, this hasn't worked quite as planned:
Many homeowners and mortgage brokers anticipated that the higher limit would lower rates on bigger loans to match the conforming rates. Instead, it has created a middle tier of rates for loans between the old $417,000 limit and the new $729,750 limit. Investors are demanding higher yields for those loans because mortgage investments have imploded and investors fear the larger loans will make bundles of conforming loans riskier."Borrowers and Realtors say rates should be as low as possible - end of story," said Tom Kelly, spokesman for Chase home lending, which started offering mid-tier loans in mid-March. "But other people have to sort through the realities. We just don't know enough about how the market will work, exactly."
This middle tier of loans has come to be called "agency jumbos" because the agencies of Fannie and Freddie can buy them. But Keith Gumbinger, an analyst for HSH Associates in Pompton Plains, N.J., sometimes calls them "tweeners."
Mortgage brokers and borrowers, however, are more likely to call them a disappointment.
The story gets better:
This story may not apply to dense urban areas like parts of California or the Northeast, but it applies in most of middle America.
A lot of those jumbo loans went to McMansion's that were built when expectations that Americans will trade their homes for larger and larger ones, and be willing to live in the exburbs for the space.
Suppose that the rise in energy prices is only a fore tale of whats to come, and ultimately energy prices will end up 3 to 5X today's prices in 10 years in real terms.
The price of large homes located in exburbs will likely tank as people prefer to live in more compact communities closer to work, school, shopping, etc. The cost to maintain these very large homes would also become an issue as people discover that they are relatively flimsily built (who cares when everyone is flipping them ever few years anyways), and hence, is an energy and maintenance hog.
For those people with long memories, go look in areas that were the McMansion boom towns of the 1930s, and look what happened to many of them after the boom.
The nouveau riche ended up not being able to afford the upkeep of what is basically an illiquid asset, and ultimately, it fell into disrepair, and many became the property of the lenders or, worst, the local government for unpaid taxes.
There is a not insignificant risk that the same phenomena will repeat itself. Any large home in the top quartile of a market's price / floor area range has this risk of being a McMansion bust town.
Lenders,if anything, are not pricing this risk in adequately. The default rate is much higher than they are betting on right now with the new 'agency jumbos'.
We are but in the first few innings of this bust.
The next revolution will be in homes that are modest sized, but ultra convenient to schools, work, shopping, family and friends, and also built to be two to three times more energy efficient on a system level than current construction.
D: The next revolution will be in homes that are modest sized, but ultra convenient to schools, work, shopping, family and friends, and also built to be two to three times more energy efficient on a system level than current construction.
Ah, the continual hope of the American liberal:
Some technological change out there will cause social change in a left-wing direction. It never works. Technological change in America only causes more technological change.
Upton Sinclair wrote The Jungle hoping to ignite socialist revolution. Instead, he got meat inspection and better meatpacking technology.
In the 60's it was overpopulation. The liberal hope was this would make Americans live ascetic lives run by elites in government. Instead, we got the Pill.
In the 70's, it was global cooling. We all need to embrace asceticism and surrender our freedoms to the government! Of course, that blew over.
In the 80's liberals were hoping that smog would drive people to small houses and large government. Instead? We're still spread-out, we just have catalytic converters and computerized engine control.
Now the big home is that global warming and high oil prices will finally force Americans to become meek and ascetic.
Instead, global warming hysteria will bring us plug-in hybrids, biofuels, low-energy lightbulbs and energy-efficient construction.
Expect a Chevy Volt plugged into that well-insulated, CFL-lit McMansion.
We're going to innovate our way around global warming just like we innovated around everything else. We'll grow energy-positive biofuel crops, increase the Earth's albedo, possibly iron-seed the ocean, increase nuclear power usage.
We'll beat global warming *and* keep our autonomous lifestyles, which will drive liberals up the wall, because it's not global warming or global cooling or overpopulation or underpopulation they really want. They want Leviathan.
We're gonna have our big cars and our big yards and our big houses and big portions, we will continue to ignore the culture of the elites and thumb our noses at their nagging, and the elites are just going to have to choke on it. We're not going to cower in high-rise Soviet-bloc eyesores, begging for our betters in government to run our pathetic little lives for us. We're going to ride off into the sunset, into the great, spread-out open country, pitch our camp where we feel like and raise our families the way we please. It almost makes me want to break out into the theme song for "Team America".
Once again the endless creativity of the American people will tell, and once we're gonna win, and once again our sniveling, nagging, sanctimonious elites are just going to have to suck it.
America! F*ck yeah!
My gosh, one sentence can send someone to write 1,000 words.
Not quite the same as the face that launched 1,000 ships....
But I promise to try harder.
D,
You have to admit that a lot of liberals do mock the trend towards suburbanization and exurbanization. If I had a dime for every time one predicted a reverse migration back to cities and hollowing out of the suburbs and exurbs because such lives will become too expensive, I would be a very, very wealthy man.
Like secret asian man, I see such hopes as kind of silly. The jobs will just move (as they have) out to where the workers live.
I said nothing about (big) cities.
I said "compact communities" which can be an island in the middle of nowhere, but well supplied and have work, recreational activities, and commerce within a short commuting distance.
Doing work with a minimum of travel is going to be a big thing.
Not to bring personal things into it, I cut my mileage by air and land by at least 50% in the past 5 years, mostly because of hassle as opposed to just cost. Even for trips of 1,000 miles, I prefer when possible to drive 2 days each way than to fly. It is real tiring to have people going through your stuff for the privilege of having you pay to use their service.
It is sort of humorous how some people are so frothing at the mouth at imagined ideological enemies that they can summon a counter propaganda machine without even reading what they are railing about....
Some of the people here are no different from them people who are upset at those dutch cartoons, which they have never seen and insist for religious reasons not to see!
Some of the people here are no different from them people who are upset at those dutch cartoons, which they have never seen and insist for religious reasons not to see!
Posted by D | March 29, 2008 11:47 PM
D,
worry not, those who may see, will.
those, without vision, will not.
Let's come back to the central point of what this was aimed at, namely enabling larger and pricier homes in America's costal zones.
What. The. Bloody. Hell!?!
Let me point out that there is not an Insurance Company around that covers those areas in cases of weather related damage or destruction. Has Not Been For Decades. Federal insurance is the only coverage for that in those areas. What this does is just raise the Federal costs for when (not if) storms damage costal zone housing. There was a *reason* for having higher interest rates in these areas for homes that large. The biggest was a recognition of the fact that those homes are damaged and/or destroyed faster then in other areas of the U.S.
Heck, the only safe home I know of (it took a direct hit from Ivan and survived while 80% of Pensacola Beach homes where damaged or destroyed outright) for such a zone is currently up for sale. http://static.monolithic.com/domesinnews/2008/doahpressrelease/index.html
And there are two such structures in Iraq. One took a 5000lb bomb that trashed the interior but left it structurally sound http://static.monolithic.com/gallery/churches/iraq/ and the other (in an old Iraqi military compound) has been used by the troops for target practice before someone got a penetrating hit http://static.monolithic.com/domenews/2008/01jan/testament/index.html on it.
So if the Federal Government was going to encourage any kind of homes in the costal zones I would hope that they would be encouraging one’s that empirical evidence shows can take the weather hits that these areas take. Not something that just encourages larger and higher cost everyday houses.
D-
you inadvertently activated the Resenta-a-Bot 2000 - whiny glibertian version.
Sucks for you- ya shoulda known better.
Gee, do gov't agencies really need to grease the skids for $500k-$750k mortgages?
If a loan is prudently underwritten, a family should have (by my terms) about 1/3rd of the price in pretax income ERGO a combined $250,000 annual income for a $750,000 house.
Are we giving families with a $250,000 income a tax rebate? NO?
I'm all for helping high income families be treated as equitably as others, but there is probably a reason that investors know these mortgages are a stretch. The bigger the mortgage the more likely that the borrower is stretching and that the property is subject to many fickle factors.
Consider condo loans on 5th Avenue in NYC. To get a $5 million mortgage from the few lenders that offer them, you basically have to be so loaded you could almost buy the property for cash (the condo or coop boards will usually insist you have high income and cash reserves as well).
The higher the loan amount, the more of a stretch. What the Chris Dodds and Barney Franks of the world are doing is pushing loan standards that already suck further up the mortgage food chain. It's no wonder that the investors balk and won't pay Fannie/Freddie yields for these loans.
The government need to grease the trap doors of the scaffold for the people stuck with jumbo mortgages.
As for flood insurance, one of the neat tricks about it is few people know how politicized it is, in terms of the way maps are done, the amount of coverage offered, etc.
A few years ago, I actually looked into buying a home in a coastal area (like miles from the coast, on top of an ancient shoreline), and it was still counted as a 'coastal county' and had high rates.
The amazing thing is that flood insurance is pretty much a joke because it covered only up to $250k of building and $100k of contents. What this means is that a home that is 'totaled' cannot be worth more than $250k.
Now the story gets better. That $250k of coverage is it. If rebuilding costs skyrockets, as it must after a major event, you are on your own. It does not cover what it cost you to rebuild.
For that matter, if the infrastructure is destroyed (roads, utilities, schools, services) does it matter that your home is intact? That is the problem with the dome home people --- who cares that they are the only one left standing if there is no longer road access to their house?
Then there is the mortgage trap. Suppose you have a home with a $400k mortgage on the coast, and it is flooded /destroyed. You get a $250k check from the insurer, but you still have a $150k debt.
Guess what? You still owe the money. Even bankruptcy can't erase the debt.
Want more fun? Now that the distinction between flood and non-flood risk is blurred (by the lawsuits), insurance companies are subtly and quietly raising the cost of all property insurance on the assumption that they are going to have to pay out something.
If you look at the terms of the most recent policies written in the past year near high hurricane risk areas, you will find neat little changes that, in effect, give you considerably less coverage.
One of the more interesting standard clauses is if you leave your home unattended for x period of time, it voids your coverage.... I wonder what that does to your coverage if you evacuated?
Watch for the insurance companies to start enforcing these things.
Or add clauses like you have to have secured the place (shutters, etc.) prior to evacuation.
The great American free lunch party made possible by declining energy and commodity costs, rising real estate values and low interest rates is at an end.
D,
Fair enough, in your case- I see what you were saying. However, I would argue that we already have these compact communities- they just aren't spread out away from each other in the "middle of nowhere" so that it is so obvious, but, rather, are all globbed together in one massive suburb surrounding the historical American cities. Suburbs and exurbs are not homogenously residential- they are dotted with shopping centers, malls, office parks, and restaurants everywhere. You really have to be living in the literal country to have to drive more than 20 minutes to buy anything or work anywhere.
Yancy,
Hmmmmm.... let me give you an example.
There is a community called Peachtree City.
http://en.wikipedia.org/wiki/Peachtree_City,_Georgia
It is somewhat past its prime (older houses in it are now quite old and too small for modern tastes, and typical sub-urban decay has begin to set in in parts of it...
What makes it a neat community is that it is four "villages" centered around golf courses. A network of golf cart paths mean that you can go nearly anywhere (school, shopping, recreation, kids things) without having to drive a regular car.
Everyone have their 2.5 cars at home, but the use of it is optional for 50% of the daily grind of life (except for the work commute assuming it is outside of the community).
Golf carts come in different flavors, from battery only ones to gasoline ones, to gasp, ones that can be powered by anything. You can even bicycle or walk on those paths.... though it might raise a fuss if you tried donkey carts.
I myself want the ultimate status symbol: A sedan chair carried by 4 servants.
Neat, huh?
Re: However, the date itself is fixed using the calculation of the Alexandrian church, which happens to link to the date of the Jewish passover, but is not calculated using it.
This is not true. Mortgage debt can be erased in bankruptcy. In fact the courts are still clogged with post-Katrina (Ivan, Charlie, Rita, Wilma) cases of people doing exactly that. Some of them may of course end up in Chapter 13 programs where they will partially repay the debt. The truly destitute however will have the debt 100% excised in Chapter 7.
I may be leaving out a couple of esoteric matters, but the onluy debts I know of that cannot be erased in bankruptcy are:
Tax debts more recent than 3 years (including now credit card payments for taxes)
Student loans
Child support and alimony
Court ordered restitution for criminal actions
Most fines and court costs
Some tort judgments
JonF,
I checked the facts:
Chapter 13 do not allow residential mortgage debt to be modified. The debt can be reaffirmed or alternatively, the property need to be sold.
Chapter 7, I do not know off hand.
Here is the fact situation that need to be addressed:
Hypothetical Homeowner owes $1,300,000 mortgage on a home worth $1,000,000 at fair market value.
Sale of the property (after real estate fees,etc.) might net 92% of the value of the home, assuming it is not a fire sale. So net $920,000.
Sale by a trustee under Chapter 7 might fetch less.
Hence, $380,000 in debt remains.
Is that debt dischargeable under Chapter 7 or 13?
Re: Chapter 13 do not allow residential mortgage debt to be modified. The debt can be reaffirmed or alternatively, the property need to be sold.
If the property has been foreclosed on, and the fireclopsure ir REO sale has been "short", any residual amount owed (if not simply charged off, the usual practice) can be erased in bankruptcy. You are correct that you cannot keep ownership of real estate and have the mortgage on it altered in bankruptcy.
Re: Chapter 13 do not allow residential mortgage debt to be modified. The debt can be reaffirmed or alternatively, the property need to be sold.
If the property has been foreclosed on, and the foreclosure is REO sale has been "short", any residual amount owed (if not simply charged off, the usual practice) can be erased in bankruptcy. You are correct that you cannot keep ownership of real estate and have the mortgage on it altered in bankruptcy.
Which means you have to eat the amount of the entire loss, plus whatever fees, interest, etc. the bank charges for the unpaid balance up to your total net worth less exemptions.
Up until recently, if the debt was forgiven, you owed taxes on it! Now, the rules on that changed slightly, but that is another trap when you are dealing with large upside down loans.