Will Higher Government Loan Limits Boost Seattle’s Market?

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.

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About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market. Tim also hosts the weekly improv comedy sci-fi podcast Dispatches from the Multiverse.

58 comments:

  1. 1
    newbie says:

    It seems to me that these new securities are a great thing to invest in. I am betting they will be undervalued because people are scared of the mortgage industry. And with standards that strict for getting these loans I am thinking they will be quite safe investments.

    NOTE:
    I have just started looking at the stock market and securities so my knowledge is minimal.

  2. 2
    MisterBubble says:

    I agree that the lending standards for these are significantly more stringent than what we were seeing in 04-06. But is anyone else tweaked by our “leaders” populist, pandering policy response to a crisis caused by….populst, pandering policies?

    Our economy is a runaway train, barreling toward a vast, deep canyon. So what do the politicians do?

    “Throttle up, Bennie! If we get goin’ fast enough, maybe we can jump ‘er! YEE-HAW!!!”

  3. 3
    S-Crow says:

    I believe a lot of pressure to increase the conforming limit was to assist those borrowers located in high price locales to refinance and lift some payment stress.

    Obviously, the agency capacity to buy these higher limit loans would also assist in moving the log jam in the markets.

  4. 4
    Buceri says:

    What that expression? “rearranging the deck furniture on the titanic??”

  5. 5
    Mike2 says:

    The real news is the corresponding change to the FHA limits, since the requirements are far less strict.

    Taxpayer backed subrpime jumbos are now in the pipe.

  6. 6
    Plymster says:

    Well done, Tim! I’m glad you took the time to access the new loan regulations rather than just chatter about the new, higher limits.

    My take is, it won’t matter how high the temporary jumbo limits are if no one can qualify for them. And by requiring 90% CLTV (that is, at least a 10% down payment and 700+ credit score, they’ll have few takers.

    And that’s only if you can find an independent auditor that the banks will trust. I’ll bet the banks are going to be even more squeemish than ever, now that they’ll have to hold the mortgages themselves, and with prices plummetting, I doubt even the 10% down payment is going to make new mortgage-holders feel secure.

    Newbie – It’s worth noting that the catastrophes that are taking place in the credit markets right now suggest that not only are these securities nowhere close to the bottom yet, there is still a ton of pain left to be felt. The Fed Chairman doesn’t blurt out things things like some banks will go under and foreclosures are returning 50 cents on the dollar on average without much worse skeletons hidden in the closet.

  7. 7
    deejayoh says:

    Obviously, the agency capacity to buy these higher limit loans would also assist in moving the log jam in the markets.

    But agencies aren’t buying the loans, are they? As Tim points out – I think they are issuing a new class of bonds for these, which are likely to trade at a premium to existing “conforming” loans.

    Net of this, as near as I can tell is absolutely no impact.
    – Bonds for this new class of “jumbo conforming loans” are likely to price out 50 – 100bp higher than current GSE loans – so borrowers will pay a premium (same as today)
    – Qualifying for these loans will require reasonable credit and a down payment: (same as today)
    – high LTV, damaged credit products are still not available (same as today)

    what changes, other than the name of the entity writing the paper?

  8. 8
    newbie says:

    Thanks plymster

  9. 9
    BubbleBuyer says:

    When I intially started reading about the temporary increased limit allowed by Fannie Mae and Freddie Mac I got a little excited despite my view that government intervention in free markets is never a good thing. I figured I might be able to pay down my mortgage to get below the $560 level and refinance into a mortgage at less than my 6.2% rate.

    However, since these jumbos will be pooled separately, I don’t see a significant drop in the the spread between original conforming jumbo 30s and the “new conforming” 30 year because even though this pool traditionally is more reliable it has some attributes that make it less desireable. One being the jumbo mortgage holders pay off their mortgages earlier which upset investors. Still, it may help buyers shopping for a jumbo mortgage at something less than the 1% spread between conforming and non conforming mortgages.

  10. 10
    MacAttack says:

    I read the list. Anyone spending 420K for a house in Tennnesee! deserves what they get.

  11. 11
    The Bruce says:

    It is a start, but there’s a long way to go before the market hits bottom i most markets anyway.

    My wife and kids missed ‘home’ (mostly family) in AZ, so we’re moving back after enjoying a great year up here in the Northwest (you locals don’t know how good you have it!). Found a lender-owned home, 2900 sq’, 3cg, solar heated pool, nice sized lot, one of the best school districts in town (Gilbert), for $315k. And with the new FHA limits, was able to get the bank to cover 3% down and 3% to closing. So we get into a house for $750 (appraisal and inspection) that sold for ~500k at the peak of the market.. Its on zillow.com zestimated at 405k, but we know thats a sham. Even if thats off by 20% down the road, we’re still insulated with a mortgage of $315k at 6%, and we got in with zero down thanks to downpayment assistance programs. Was a little surprised the bank accepted our offer, but in PHX they’re getting more desperate every day. There will be bargains to be had in the Puget Sound in 2-3 years that will rival this, and the new limits – both lending and lender desperation – will give those who have been patiently waiting through this mess exactly what they’ve been waiting for.

    Have really enjoyed following the blog while I’ve lived up here. Will miss Seattle quite a bit, especially in the summer. ;)

    So those waiting to stake their claim on real estate here in the NW – keep holding out.. Phoenix was just a couple years ahead on the binge bubble timeline, and legitimate bargains can finally be found there.

    – El Bruce

  12. 12
    Joel says:

    that is, at least a 10% down payment

    If your loan is 90% LTV the other 10% doesn’t have to be a downpayment, it can be a second loan. Except the guidelines stipulate that at least 5% has to be a down payment, so a borrower can still get these TJCs with only 5% down if he can find a second for the other 5%.

  13. 13
    rose-colored-coolaid says:

    Good to see your analysis. This makes sense, that raising the rates is just another fake.

  14. 14
    Samuel says:

    I like the post in general…it stands to be seen how much this will help. It sure won’t hurt but it may not help as much as many people think. One correction though…the new loan limits actually take place immediately. It is dated July 1, 2007…not 2008.

    I don’t understand exactly why…but I know it allows for the selling of some loans that have happened since the mortgage problems began last summer….possibly helping bail a few more lenders out.

    I guess we’ll see what we have going forward from here…I’m optimistic but I like reading your blog because it sometimes kicks me back to earth from the mixed lies (both pessimistic and optimistic) the media always brings out.

  15. 15
    The Tim says:

    Oh, I didn’t catch that. July 2007, odd. I’ll correct that, thanks.

  16. 16
    Sniglet says:

    since these jumbos will be pooled separately, I don’t see a significant drop in the the spread between original conforming jumbo 30s and the “new conforming” 30 year

    Pooling the Jumbos with all the other loans would just lead to a different set of problems: we might see rates for ALL loans types (Jumbo and non-Jumbo) rise somewhat. Regardless, the credit markets are getting skittish even with non-Jumbo GSE securities, with the spreads rising substantially in recent weeks. Things are coming off the hinges just fine without the aid of Jumbos.

  17. 17
    Ubersalad says:

    This is actually one of the most informative piece of information I have received on this website in a long while.

    Nothing like the professionals at raincityguide and their “spit out an uninformed piece full of quotes from equally uninformed newspaper reporters”.

  18. 18
    The Tim says:

    I wasn’t intending to direct that comment at anyone. I was just saying that was my other option, which I chose not to take.

    P.S. (what happened to my gravatar? weird.)

  19. 19
    Alan says:

    Off topic, but it looks like RCG is suffering a meltdown.

  20. 20
    deejayoh says:

    Oh, I didn’t catch that. July 2007, odd. I’ll correct that, thanks.

    that’s the “bail out the balance sheet of the lenders” provision. Most big lenders are carrying all kinds of loans they’ve originated on their balance sheet because they can’t sell them into the MBS market. This allows them to recapitalize through the GSEs

  21. 21

    I can’t imagine that raising the limits on jumbo loans is going to have much impact. It’s not like throwing a liferaft to a drowning man, it’s more like throwing a pretzel to a drowning man….The reason they raised the limits is to make homes more affordable in certain areas ( like Seattle) by having slightly lower interest rates( conventional vs jumbo)…I think the only way people will jump back in is with either significantly lower interest rates, or significantly lower home prices.

  22. 22
    magnolia44 says:

    i think the jumbo only helps those who dont need it too much. Those with less than 20% down will still have to pay pmi unless they piggyback the second. People like my father in law who have a 550k jumbo with more than 20% down on his house can refinance if rates ever go lower but that is not even looking possible.

    I did a 95% ltv and my combined rate is still under 6%, first is at 5.75%. No pmi no penalties both fixed rates.. you have to know where to look and how. For those who are going to call me dumb for only putting down 5%, please keep in mind I was able to keep $30k+ more by going for the 95% option and it only raised my payment by $170 when all was said and done.

    Now its time to pay the $5k to get this place converted to natural gas, until next time guys.

  23. 23
    magnolia44 says:

    BTW the loan plans are not even in affect and people over here in Magnolia continue to buy these townhomes which are not in the best of locations for $575k+… one at $679k just went sti. Some things i will never understand and its these townhomes that people actually buy. I think 3-4 have gone STI in the last month, truly baffling.

  24. 24
    Everett Renter (Used to be Buyer) says:

    On March 4, Federal Reserve Board Chairman Ben S. Bernanke gave a speech “Reducing Preventable Mortgage Foreclosures” to the Independent Community Bankers of America Annual Convention in Orlando, Florida.

    You can read it on the Fed’s web site here: http://www.federalreserve.gov/newsevents/speech/bernanke20080304a.htm

    The speech appears to me to indicate that our Federal Reserve Board Chairman is recommending that financially irresponsible borrowers be subsidized through actions such as write-off of principle by lenders. This in my opinion is a bail-out at the expenses of those of us that have behaved financially responsible. I suggest you read the speech yourself and form your own understanding and opinion. Long story short for me is that I am infuriated with the direction our Federal Reserve Board leaders and our Federal elected representatives have been trying to go in bailing out the financially irresponsible concerning the housing market. In my opinion most foreclosure are an expected and good thing. They are a market correcting consequence for financial irresponsibility, and they encourage people to behave responsibly, and discourage people from exhibiting financial irresponsibility. In my opinion the housing market should be allowed to correct itself. I have recently expressed these opinions to my two Senators and House Representative, as well as the Federal Reserve Board. I suggest you express yourself to them as well. These folks are making decisions that will impact you.

    Here is my favorite quote from the Chairman’s speech:

    “Concerns about fairness and the need to minimize moral hazard add to the complexity of the issue; we want to help borrowers in trouble, but we do not want borrowers who have avoided problems through responsible financial management to feel that they are being unfairly penalized.”

    Well, as I expressed to the Chairman and the board recently, its not that I will just “feel” unfairly penalized by their recommendations, it is that I and many other financially responsible citizens WILL be unfairly penalized if financially irresponsible home owners are bailed out by the recommendations !!

  25. 25

    I’m guessing that the biggest benefit in the temporary conforming limit will be to off load the jumbos from last summer—clearing credit lines. I’m not so convinced this will be a benefit to Joe Consumer.

    The big factor is going to be what the add to rate will be.

    I think FHA will be a better route than conforming…FHA will be the “new jumbo” if borrowers can get over paying upfront and monthly MI.

    If anything this could hurt the Seattle market. Sellers will sit back on longer thinking this is going to bring back their home values since there will be more buyers and buyers will think they’re going to have a great conforming rate for a jumbo loan. The great divide will continue.

  26. 26
    The Tim says:

    Thanks for chiming in Rhonda. I appreciate hearing the opinion of someone with a lot more knowledge on this subject than I have.

  27. 27

    The Tim, I appreciate your views on this and I think you did a great job on this post.

    Time will tell how this is going to pan out.

    What I’m seeing this week is
    #1 More buyers coming out of the woodwork.
    Two…they’re making a lower offer or asking for closing costs that the seller rejects.
    Three…the seller calls back…”umm…maybe I was too hasty”.
    Four…we have a transaction.

    Now if we can close it before underwriting guidelines tighten too much.

    All home buyers should make sure they have the proper wording in their purchase and sales agreements to protect against this ever changing mortgage climate (if that’s possible).

  28. 28
    Marc says:

    Rhonda,

    The NWMLS is not making it easy for buyers to “protect against this ever changing mortgage climate.” The October ‘07 revisions to the NWMLS Form 22A Financing Contingency further restrict a buyer’s ability to protect against changing circumstances. For instance, the form now states the “buyer may not change the type of loan or the lender without the Seller’s prior written consent after the agreed upon time to apply for financing expires.” The default period is 5 days after mutual acceptance. It’s easy to see why sellers don’t want a flip-flopping buyer, but this change seriously limits a buyer in obtaining the best available financing. Real estate agents are not authorized to modify boiler plate language like the above clause which further restricts the buyer. A buyer who has any concern about this clause should consider seeking legal counsel to advise them on modifying this clause. Equally important and possibly more so, sellers should seek counsel when a buyer presents them an offer with this clause modified.

  29. 29

    The bottom line remains the same. Can you afford the house and keep it year after year irrespective of the market condition?

    Amarjit Sandhu
    http://www.500realty.net

  30. 30

    Marc,
    I was thrilled when that clause first came out…didn’t really think of how it impacts the market today.

    Appraisals are scrutinized and come in at the tail end of the transaction typically.

    Lenders may receive less than 24 hours notice of programs ceasing where the file must be submitted and and then days to close.

    Perhaps buyers should put down less e/m if they’re not sweet vanilla with 20% or more down, 700 credit scores, full doc conforming?

    Do you really think the buyer is notifying the Seller if they switch from a 10/1 ARM to a 30 year fixed but sticking with the same lender?

  31. 31
    Deran says:

    “But is anyone else tweaked by our “leaders” populist, pandering policy response to a crisis caused by….populst, pandering policies?”

    I would disagree. All this financial collapse (mortgages, dollar valuation, debt load, etc) is directly the result of the “free market” Reaganomics/Neo_Reaganomics that have driven federal policy for the last 26, 27 years.

    I really can’t see this is all as just an anomaly, a bit economic indigestion. I honestly think it’s the nature of this sort of under-regulated, rapacious capitalism. My hope is that if the depression hits hard enough we will get some return of the public interest in economic policies.

  32. 32

    Deran-
    Yup, I totally agree that a lot of this mess has to do with deregulation and authorities turning their heads and ignoring it when fraud and near fraud were running rampant.
    but….do you trust “this” government to fix things?

  33. 33
    Sniglet says:

    Yup, I totally agree that a lot of this mess has to do with deregulation and authorities turning their heads and ignoring it when fraud and near fraud were running rampant.

    No, I don’t think that “deregulation” was the problem. We have much more regulation today than there was back in the ’20s, but that doesn’t seem to have helped much. It is my belief that bubble manias will ALWAYS wind up sucking everyone into their distortion fields, including the government. Keep in mind that our politicians are just members of society, and are driven by the same passions and beliefs of everyone else.

    Anytime the accepted wisdom of society is being tainted by a bubble (e.g. real-estate only goes up), then no amount of “regulation” will save us. Politicians, and regulators, will find reasons to let things slide.

    In fact, you could almost say that deregulation was just one of the symptoms of the credit bubble itself. The credit bubble caused deregulation to occure, not the other way around.

    If my hypothesis is correct (i.e. that bubble manias lead to a relaxing of all prudence, in government and elsewhere), then the conclusion is a very sobering one: there may be nothing we can do to innoculate society from future bubble manias.

  34. 34

    :” there may be nothing we can do to innoculate society from future bubble manias.”

    Now THAT I don’t disagree with. Was it WC Fields or PT Barnum who said ” There’s a sucker born every minute.”

  35. 35
    Sniglet says:

    There’s a sucker born every minute.

    We’re all suckers, every one of us. The heard instinct is just too powerful to throw off. When everyone we know is telling us something it is exceedingly hard to stand up and say it is wrong, or do something different. How can I be right if everyone else thinks different?

    Even the people who “rebel”, are just fulfilling societies expectations of them by doing “normal” rebellious things.

    Actually, to a certain extent, following the crowd is completely rational. Going your own way is not only fraught with the risk that you might be wrong, but the fact that you will be a pariah amongst your family and friends. Even if the maverick succeeds, people will resent her, and if she fails, no one will have ANY sympathy. By contrast, if you take a risk doing something the “crowd” approves of, everyone will love you if it succeeds. Better yet, no one will hold failure against you since you were doing something everyone thought was smart. Look at how sympathetic everyone is with all the home-owners losing their homes in foreclosure today? It is far better to fail with the crowd than all by your lonesome.

  36. 36
    itsteveg says:

    My confusion on this topic is simple.
    My understanding and everything I’ve ever done with FHA’s has always been based on the fact that FHA barely relied on FICO and more on other qualifications (debt to income ration etc…)
    Why would they change that so drastically?

    I will find out on Monday whether the FM document and FICO issue is real and I will report back (based on a loan I am trying to get).

  37. 37
    Ben says:

    Alan – which article on RCG shows that it is melting down? I want to read it….

  38. 38
    Alan says:

    RCG lost all of its articles and comments for a while the other day. It looks like they repaired it.

  39. 39
    Chris says:

    This is completely off topic. In late February, I was following a condo that was both for sale and for rent in Phinney Ridge. At the time, the redfin info indicated the carrying costs were at least $2400/month, and the asking rent was $1600.

    In early February, the listing was pulled and the rental stopped showing up on craigslist. I thought it had been rented. Now it is back:

    http://seattle.craigslist.org/see/apa/599658006.html

    In some ways, I think this low level view of the problems for owners who bought near the peak is more interesting than the high level/statistical/ view. Prior to someone going into foreclosure, or doing a short sale, there is likely to be a long, hidden period of ‘struggling to make it work.’ I think in many cases we are in that period in Seattle.

    There are other major condo projects that also have overpriced rental listings in the greenlake area, like this one in the fancy ‘fini’ condos:

    http://seattle.craigslist.org/see/apa/598603717.html

    There are at least two listings in Fini that have been on craigslist for 3 months. In both cases, the rental prices for 1 bedrooms are comparable to those for 2-3 bedroom apartments and small houses for rent. I suspect these are flippers who got caught unable to sell, since the rental prices are clearly unrealistic.

    And there is a condo project in greenlake proper, called Florera, which is clearly near empty and has been for 6 months. I think many recent purchasers are going though pain now, but it hasn’t quite shown up in the pricing. They will hold out a while longer, but sooner or later the carrying costs will overwhelm them and they will try dropping prices in an effort to escape the carrying costs.

  40. 40
    softwarengineer says:

    HI TIM, YOU CAUGHT MOST OF THE SALIENT IMPACTS I THINK

    Don’t feel bad, even experts in today’s hedge funds, SUVs, acronym mess can’t make heads or tails of this witches brew either.

    Here’s a Dr. Roubini blog from me recently:

    “…IS THIS A SCENARIO FOR SOCIALIZED WELFARE TO THE RICH ELITE BANKERS?

    The Fed keeps reducing interest rates lately and we watch our savings accounts fetch like 2% less in 2008 than 2007? Gee….we can all afford to retire on like $10M cash, with theses measly CD and money market rates?

    Meanwhile home mortgage rates may drop like a measly 0.2% if you’re really lucky, or even increase to like 6.7% recently; depends on the bank. I assumed great credit and 20% down fixed too. Check it out.

    OK, who’s pocketing the welfare scooped from our joke 401Ks????

    The impact of lost income for retirements wasn’t even covered by Dr. Roubini or the “Wolf” guarding the chicken house; but in my opinion, its not a mitigating factor to sweep under the rug at all. There’s a huge Baby Boom glut about to retire and if they have no incomes or drastically reduced 401K incomes [stock losses included with money market and CDs]; granny bar the door, Wolf’s $1 trillion is a complete joke, especially with their 80M upper tier type homes suddenly on the market, as they downsize for retirements.

    And…..welfare to the rich elite banks doesn’t necessarily “trickle down” to today’s new home buyers with fed rate cuts. In fact, lately, its just the opposite.

    Written by Softwarengineer on 2008-02-29 14:01:28….”

    Read the rest of the URL, especially the blog comments from scholared university type economists and globalist investors:

    http://www.rgemonitor.com/blog/roubini/246724/

    If it won’t let you read it without registering, please register Tim, its free and a treasure trove of information on the banking mess Seatte’s currently in.

  41. 41
    explorer says:

    Thanks for your input Rhonda. I asked and assumed a similar situation in the Forum yesterday. Good to see the more honest RE pros think along the same lines. I thank this blog for giving me more spidey-sense than cynicism on that topic.

    Used to be, FHA’s were the salvation of first-time responsible buyers, so I always followed it closely. Now, it seems to have drifted to the worst of both worlds–You might not qualify unless you really don’t need it to qualify.

    Fundumentals be damned. Unless and until it reverts to a situation like the poster moving back to AZ describes, this increased limit won’t be used by anyone unless they refi. Refi’s were never the purpose of FHA loans before, and there was a good reason you had to have not purchased in X number of years to use FHA: speculaton.

  42. 42
    explorer says:

    Singlet, I don’t necessarily agree with all of your statements on regulation and the psychology of crowds. Regulators exist to stay above that fray, and put the brakes on harmful behavior, especially when in a bubble. Degregulation exists de facto when regulations are not enforced too.

    Crowds will also riot if you let things get too far out of control. When you let the fox guard the henhouse, the results should not come as a surprise.

  43. 43
    explorer says:

    OT on Chris — I have been following the fini situation since I was invited to the “pre sales” event. I got there an hour after opening, and ALL the prime spots (not facing Greenwood Ave), were already “sold.”

    The prices for the remaining were in the low 300’s at the time, including the one now for rent. The prime spots went for well over 400K if I remember what I was told correctly. The buzzards are circling, but I agree may not land there for awhile.

  44. 44
    Marc says:

    Rhonda,

    Regarding your question: “Do you really think the buyer is notifying the Seller if they switch from a 10/1 ARM to a 30 year fixed but sticking with the same lender?”

    I would guess that most buyers are not informing the seller when they switch loan type or lender. It’s only a matter of time until one of these folks gets called on it by a seller when he or she tries to back out based on lack of financing. If they got pre-qual’d on an Interest Only ARM and later provided a loan commitment letter on that basis only to later switch to a fixed rate program and then have that program fall out from under them for some reason (e.g., inadequate debt ratio with the higher monthly payment), the seller will have a strong argument that the buyer waived the financing contingency by not obtaining the seller’s consent to the change. But, did the buyer really waive it? Maybe he should be estopped to rely on its protection? The Form 22A now restricts buyers but provides no specific remedy for a seller who is harmed by a buyer’s violation. A classic canon of contract construction is that courts will strive to give each provision in a contract meaning, thus, a judge might decide that the parties intended for there to be some consequence if a buyer failed to obtain seller consent before switching, therefore, failure to do so waives the contingency. But, I can think of other sets of facts that would make the buyer seem sympathetic.

    I’ve got a case right now where strict compliance with the Form 22A is a major issue, so this change is of particular interest to me. I can argue this clause both ways and that’s the problem, contracts need to be clear and straightforward to the extent possible, not vague and ambiguous.

  45. 45

    Software Engineer,
    If I’m interpreting you correctly( Or Roubini),extrapolating, the baby boomers, the “me” generation will have squandered their savings on themselves, their kids will resent their self indulgent hippie parents, forcing them to put the homes up for sale so they can still attempt to shop at Whole Foods, but there will be so many homes on the market as a result of their poor planning and economic circumstances that prices will have no choice but to keep dropping.
    I’m not sure I completely agree, and I see home prices maybe doing a “last hurrah” upswing between 2011-2015?ish but after that maybe the sh*t will really hit the fan?

  46. 46
    Sniglet says:

    Regulators exist to stay above that fray, and put the brakes on harmful behavior, especially when in a bubble.

    Unfortunately, regulators are a part of the crowd themselves. It’s not as if they are robots, just carrying out a program. The regulators are appointed by politicians, who themselves reflect the mood of the “crowd” (i.e. it’s the crowd that elected them). Moreover, the regulators know that they don’t want to get on the bad side of their political masters.

    Sure, one could just blame a particular president, or politician, for appointment the rotten regulators, but my point is that it is inevitable that crummy politicians will be chosen during bubble manias. Thus, there is nothing we can do to prevent a future crop of scumbag politicians to be elected during the build-up of the next mania, who will undermine the regulatory system.

    Regulators will always be MOST effective at the bottom of economic cycles, when society has had it up to the gills with corporate shenanigans. At that time only the politicians screeming for capitalist blood will be elected, and they will certainly have the backbone to appoint the boldest, tough minded regulators that ever walked the earth.

    Given a couple generations, however, and the principaled regulatory regime will start to unwind. When the time since the last bubble is sufficiently long, people will forget what happened and be more concerned about the “unnecessary” restraints regulations have on economic growth.

    It’s just the cycle of human nature…

  47. 47
    Herman says:

    I think Sniglet is right on. There’s a difference between taking a risk and doing something stupid. Taking a risk is doing something that nobody else is doing. But if enough people are doing something stupid, then it’s not a risk. If enough people fail and get in trouble, they become a special interest group who gets a bailout.

    I wouldn’t get too excited about the baby boom retiring and driving down prices. The US can always open the immigration spigot and allow thousands of new aspiring homeowners to replace them.

  48. 48
    economist says:

    ” there may be nothing we can do to innoculate society from future bubble manias.”

    There is nothing you can do stop bubbles in things like Beanie Babies which are purchased with people’s own money.

    But there is a lot that can be done do stop bubbles in things which are purchased with borrowed money. That’s exactly why the margin requirements were brought in after the 1929 crash.

    There are loads of things like mandatory down payments, or GSE ceilings and appraisals based on fundamental value (multiple of market rent, not what the latest greater fool has paid) that would have nipped this right in the bud.

    This bubble was also fueled by tax policy. If tax policy had discouraged house flipping instead of encouraging it, and if – dare I mention it – there were no mortgage interest deduction, the bubble would have been much smaller or perhaps non-existent.

    And as for monetary policy, no more needs to be said.

    If this RE bubble wasn’t deliberately fuelled by government, all I can say is that they went to a lot of trouble to make it look like it was.

  49. 49
    Herman says:

    economist wins.

  50. 50
    Sniglet says:

    But there is a lot that can be done do stop bubbles in things which are purchased with borrowed money

    Yes, there is a lot that could be done to stop credit bubbles. The tax deductions and GSEs, and central banks, do a lot to encourage run-away lending.

    However, I would posit that tax and government agency policies will simply reflect the broader societal attitudes towards investment and risk. They will wind up feeding whatever manias grip the nation, rather than restrain them. The Fed will be accomodative if that is what everyone wants. Politicians will vote in whatever tax policies best represent the manias of the day.

    I know it’s cynical, but I just don’t think there is anything we can do to stop huge credit bubbles.

  51. 51
    david losh says:

    I just read the article in RGE Monitor that softwareengineer recommended then came back and reread sniglet’s comment.
    Banks, financial institutions, and government regulators are all the same. They deal in intangible numbers. Real Estate is different. Real Estate is brick and mortar, does not usually go anywhere, and does not easily get lost. The numbers surrounding Real Estate can change, but the brick and mortar stays the same.
    Real Estate does not need to appreciate to be economically viable as a retirement vehicle. You can buy it for cash or pay it off, then rent it out for income. The trick is to find the properties that are economically viable for that. Will the structure last, or will it eat up your income with repair or maintenance.

  52. 52
    Runs With Scissors says:

    “This bubble was also fueled by tax policy. If tax policy had discouraged house flipping instead of encouraging it, and if – dare I mention it – there were no mortgage interest deduction, the bubble would have been much smaller or perhaps non-existent.”

    I think this is an excellent point, and that the “intent” of a mortgage interest deduction really is to promote home ownership for people and not “property” ownership for the sake of investment; though I also know that line has become blurred over the past few years due to rampant speculation.

    While I know there a miriads of Capital Gains opportunites, I can’t help but think what the result of a new law passing that would allow for interest deduction for loans to purchase stocks, bonds, or commodities. Or for that matter to make credit card interest dedcutable depending on one’s tax bracket. Would this promote ownership or speculation ;-)

  53. 53
    softwarengineer says:

    HI IRA: ON BABY BOOMERS OR ANYONE RETIRING SOON

    Multiply the 3.5% CD rates your local banks now offer on 401Ks [IRA, I see these rates plummetting much further, everytime there’s a fed rate cut, no home interest rate cuts lately either, check it out]….that means after we taxes on the interest at retirement, we’ll need like 1-2 million in the bank to make like a couple thousand a month. But when it goes down to 1.5%, 4-6 million.

    You get the picture, we’re screwed, we can’t retire on stable incomes and these iretirement ncomes are vital to Seattle’s growth too. Who can afforretirement anymore by giving the banks all our retirement interest?

    Anyway, I also agree with you too, the boomers have 2nd mortgaged their souls to the devil anyway in a lot of cases and their wealth in savings or home equity is negative or long gone too. Its also true there’s lots of boomers with cash that’s better off invested in gold, but even precious metals can be an unpredicatable roller coaster investment too. Nothing usually beats good old fashion cas in the bank with interest, trouble is, its interest is so puny now, its a complete joke.

    Let’s hope the boomers didn’t co-sign their kids’ college loans too….lol

    I know invest in stocks….lol

    I know, lets give the rich bankers more welfare, theat will help them….lol

  54. 54
    melonleftcoast says:

    economist:

    “If this RE bubble wasn’t deliberately fuelled by government, all I can say is that they went to a lot of trouble to make it look like it was.”

    Here’s an article by Binyamin Appelbaum in the Boston Globe that argues how the US, under former Pres. Clinton no less, purposely set the stage for a real estate bubble:

    http://www.boston.com/realestate/news/blogs/renow/2008/03/the_us_wanted_a.html

    Personally, I think more needs to be said about this, as well as with the 1997 (?) tax law changes that essentially encourages people to sell their principle residences every few years and allows them to keep a good chunk of profit, tax free.

    Maybe we should repeal that law to what it was before, which I believe is that a homeowner didn’t pay taxes on the sale of a house if the proceeds were used to purchase a more expensive (larger?) house. (Someone please correct me if I’m wrong, as I’m just regurgitating what I recall our accountant saying.)

    That might keep the amateur flippers/speculators out of the market, but it would still allow families to move up to a bigger house as needed.

    Oh, wait. I get it! The baby boomers are going to be retiring en masse, and we don’t want them to be taxed selling their bigger (and maybe more expensive) houses when they downsize! Now it all makes sense!

    Grumble.

  55. 55
  56. 56

    […] Unfortunately the article doesn’t really go into detail about why the loans are still hard to get, but I suspect it’s for all the reasons I laid out back in March. […]

  57. 57

    […] 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? […]

  58. 58

    […] While the tiered index values have only fallen 9-11%, the tier breakpoints have dropped around 17% in the last year. If I’m interpreting this data correctly, that means that the mix of homes selling has shifted down noticably toward the less expensive homes in the past year. If I were guessing, I’d say that is probably due to the difficulties in getting jumbo loan financing for homes priced above $567,500. […]

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