Seattle Bubble

As astute market observers may recall, back in March (pre-complete-government-takeover) the conforming loan limit for Fannie Mae and Freddie Mac-backed loans was bumped from $417,000 to $567,500 for the Seattle area (King, Pierce, and Snohomish counties). At that time, the local press was touting the new limits at “a big dose of first aid” and the “shot in the arm” for the housing market, while here at Seattle Bubble we asked the question: Will Higher Government Loan Limits Boost Seattle’s Market?

Our conclusion was that the added lending restrictions attached to the “Temporary Jumbo Conforming” loans set the bar sufficiently high as to prevent the higher limits from having the (apparently intended) effect of preventing home prices from falling further. Given that the median price of homes in the Seattle area have fallen 6-8% in the intervening seven months, it would appear that this assessment was accurate. Of course, one could argue that perhaps without the higher conforming limit, prices would have dropped 10% or more in the same time, and there’s really no way to know whether that might be true.

If we assume that the Seattle area’s $567,500 temporary conforming limit did in fact somehow soften the blow, however slightly, then the latest news that this limit is being dropped to $506,000 is likely to be unwelcome. However, it should be noted that as far as I am aware, all the same restrictions are still in place including, but not limited to:

• Fixed-rate loans are limited to 90% LTV/CLTV (loan to value/combined loan to value).
• Minimum FICO for any loan is 660.
• Minimum FICO for LTVs greater than 80% is 700.
• No late mortgage payments in the preceding 12 months.
• Full doc only.

While the $567,500 temporary limit was based on a calculation of 125% of the median home price (source), the new $506,000 limit is “set equal to 115 percent of local median house prices” (source). So the new loan limit translates to a drop in government-calculated median home price from $454,000 around March to $440,000 around October.

Interestingly, although the King County SFH median price was $440,000 in May, the Snohomish County SFH median has never breached $400,000, and Pierce County topped out below $300,000. This is explained in the announcement pdf:

In calculating loan limits, FHFA used median house price estimates calculated by the Federal Housing Administration (FHA) of the Department of Housing and Urban Development (HUD). Those values have been estimated in a manner consistent with requirements of the National Housing Act, which requires that median prices for all counties in metropolitan statistical areas (MSAs) be set equal to the median price for the highest-cost county.

So will the new, lower limit put even more of a damper on Seattle area home sales? Or was the effect of the higher limit so negligible that the reduction won’t really matter?

I apologize for not making a more timely post on this subject, but it’s taken me a while to wrap my head around everything that’s really going on, and rather than spit out an uninformed piece full of quotes from equally uninformed newspaper reporters, I thought I’d do some actual research first.

So here’s what just happened, as I understand it. Formerly, $417,000 was the maximum loan that you could get and still be considered “conforming” (as in, backed by the government-run Fannie Mae and Freddie Mac). According to yesterday’s release (pdf), retroactively back to July 1 last year, this limit is being raised for a number of specific areas around the country. In King, Pierce, and Snohomish counties, the limit is being increased to $567,500.

However, it’s not as simple as “now you can get a conforming loan for 36% more house.”

The first matter that complicates things is that these new loans made for amounts between $417,000 and $567,500 (known as “temporary jumbo conforming loans,” or TJCs) will apparently not be traded in the same pool as conforming loans on the secondary bond market. After being burned by the sub-prime fiasco, it would appear that traders have wised up a bit, and insisted that the higher-value (and higher-risk) TJCs not be pooled with conforming mortages in mortgage-backed securities. Instead, these TJCs will be packaged for trading in a separate pool all their own. What this means to the person obtaining a TJC is that the interest rate will not necessarily be all that different from jumbo loans. It all depends on what kind of market there ends up being for the mortgage-backed securities full of TJCs.

Secondly, if you think that simply raising the conforming loan limit suddenly makes it a piece of cake to get a loan up to $567,500 in Seattle, you’ve got a surprise coming. The loan guidelines for these TJCs are rather stringent. Here’s a good summary of the new guidelines, and here’s a direct link to the full details (pdf). A few of the more noteworthy details (from CR):

• For principal residences, fixed-rate loans are limited to 90% LTV/CLTV (loan to value/combined loan to value) for a purchase, and 75% LTV/95% CLTV for a no-cash-out refi.
• Minimum FICO for any loan is 660.
• Minimum FICO for LTVs greater than 80% is 700.
• No late mortgage payments in the preceding 12 months.
• Full doc only.

How many people do you suppose can qualify for a TJC with lending standards like that? It’s certainly a far cry from the “anyone that can fog a mirror” guidelines we were seeing in 2005 and 2006.

So are these new TJCs going to be “a big dose of first aid” or the “shot in the arm” that the Seattle Times front page headline is touting? It doesn’t look like it to me.

I’m not an expert in complicated matters like these, and it’s definitely possible that I’ve misunderstood something here. If I’ve gotten something wrong, please point it out so I can correct it.