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.
Posted by D | March 29, 2008 5:33 PM