The Wall Street Journal-20080126-The Stimulus Package- Details Lacking on Mortgage-Relief Plan
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The Stimulus Package: Details Lacking on Mortgage-Relief Plan
The government's plan to rev up the home-mortgage market could lower borrowing costs for a wide swath of Americans, from middle-class families in high-cost cities to those who may be facing foreclosure, but many crucial details of the plan remain to be worked out.
Congressional leaders and the Bush administration announced the plan Thursday as part of a broader set of moves aimed at juicing the economy. The mortgage relief would allow Fannie Mae and Freddie Mac to purchase or guarantee loans of as much as 125% of an area's median home price, with a cap placed at roughly $730,000, according to House Democrats. Some House Republicans, though, are trying to push that number down to $625,000. The current limit is $417,000.
The plan would also allow the Federal Housing Administration, whose programs were typically used by first-time home buyers and those with lower incomes, to insure loans as high as $730,000, up from the current limit of $367,000. The Democrats also are pushing to allow FHA to help refinance more mortgages that are facing default, but the details haven't been worked out.
The goal of both measures is to let more people qualify for lower- cost mortgages. The biggest effect could be felt in California and other places with exceptionally high housing costs, such as the metropolitan areas of Boston, Miami, New York and Washington, D.C., according to a study by Stanford Group, a research firm. These are areas where even modest homes in middle-class areas can easily exceed the current limit of $417,000 on conforming loans, those that can be guaranteed by Fannie and Freddie -- government-sponsored companies that mainly handle mortgages for the middle-class -- and $362,790 on FHA loans.
Mortgage rates on loans that don't fit those categories have become much more expensive in recent months because investors, rattled by surging defaults, are shunning loans that don't have a guarantee from Fannie, Freddie or the FHA. Lenders generally rely on being able to sell loans and charge higher rates when that may be difficult or impossible. These higher rates have hurt demand for housing in high- cost areas.
Thursday, the average rate for 30-year fixed-rate conforming loans was 5.66%, according to a survey of lenders by HSH Associates, a financial publishing firm. For "jumbo" loans, those above the conforming size limit, the average was 6.56%. That is a premium of 0.90 percentage point. Until mortgage investors' confidence collapsed in August, jumbo loans typically cost around 0.25 point more than conforming loans.
At current rates, a borrower with a $700,000 loan would pay about $4,480 a month, according to HSH Associates. If that loan could be sold to Fannie or Freddie, the monthly cost would drop to around $4,030.
Still undefined is which set of metro-area median prices would be used to determine the caps. Possibilities include those published by the National Association of Realtors and those released by the Federal Housing Finance Board. It is also unclear exactly how the geographical limits of high-cost housing areas would be defined. The most likely choices would be counties or metropolitan statistical areas, as defined by the federal government.
Lawmakers haven't agreed yet on exactly when the new rules would take effect, and the bill could get bogged down if, as is likely, some senators resist expanding the government's already large role in mortgages. Senate Banking Committee Chairman Christopher Dodd (D., Conn.) predicted Friday that some senators would likely try to make changes. But he said he was broadly supportive of the decision to raise the limits for Fannie, Freddie and the FHA, arguing that such moves would provide an instant and much-needed jolt for housing.
To mollify those who fear that Fannie and Freddie are taking on too many risks, Sen. Dodd promised to push for completion of long-stalled legislation that would give their regulator more power.
Not everyone was reassured. "There is consternation from a growing minority on the Republican side as to why we're doing this," one senior Republican aide said. "Why are we increasing the risk to these organizations that have had problems historically to the benefit of people who don't really need it?"
Another potential wild card is Fannie and Freddie's regulator, the Office of Federal Housing Enterprise Oversight, or Ofheo. The agency's director, James Lockhart, said his agency was "very disappointed" with the decision to raise the conforming-loan limit before Ofheo gets stronger regulatory powers. He said the agency would ensure that any increase goes through a "rigorous new product-approval process quickly and has appropriate risk-management policies and capital in place."
The stimulus bill is expected to clearly mandate that the increase in conforming-loan limits will expire after Dec. 31, and it would take another act of Congress to extend the increase. But Congress might find it easier to keep extending the higher limits rather than risk the wrath of builders and real-estate agents. "Once you open the door, it's going to be very difficult to close it," said Jaret Seiberg, an analyst in Washington for Stanford Group, a research firm.
