Business Week reports:
The government on Wednesday raised the mortgage limits for loans guaranteed by the Federal Housing Administration in 14 high-cost California counties.
The Department of Housing and Urban Development released the new loan limits for California -- a hotbed during the housing boom that now is suffering the worst home-price declines in the nation. The limits, with the maximum at $729,750, are derived from median home prices in each county.
HUD is expected to raise the limits in other counties nationwide in the coming days.
The economic stimulus package includes a temporary increase in the limit on FHA-backed loans, from $362,790 to as high as $729,750 in expensive areas, to let more homeowners with high-rate subprime mortgages refinance into federally insured loans.
The package also includes a temporary increase in the cap on mortgages that the government-sponsored mortgage companies Fannie Mae and Freddie Mac can buy or guarantee from $417,000 to $729,750.
The idea is to stoke investor demand for securities made up of more expensive mortgages -- so-called jumbo loans -- backed by Fannie and Freddie, the two biggest mortgage financers in the country. That would drive interest rates lower and spur home buying and refinancing.
Roughly half of all jumbo mortgages are in California, according to federal regulators.
Adding more gasoline to the fire.California real estate got into trouble because incomes of people who live in California aren't high enough to support inflated real estate values.Here's another dumb government move.Fannie and Freddie don't have the capital to fund these higher mortgage levels.Here's a look at the 6 month daily stock price of
Fannie.Here's a
chart of Fannie going back 10 years.The stock market knew long ago Fannie was a house of cards with a shifty balance sheet.Economist Dean Baker warned years ago of the housing bubble.Here's what Baker said
recently on this whole subject:
Some folks may have noticed that the stimulus package raises the limit on the size of the mortgages that can be insured by Fannie Mae and Freddie Mac, the two huge government created mortgage agencies, from $417,000 to $730,000. This is supposed to help the housing market in high priced markets, where the current limit may not even be sufficient to purchase the median priced house.
There has been very little analysis of the impact of this measure in the media and all of the commentary has come from economists who somehow managed to miss the housing bubble. If the media had relied on a broader array of sources, they would have told the public that the move is likely to hasten the collapse of Fannie and Freddie.
With house prices dropping at a 16 percent annual rate nationwide, millions of homeowners with prime conformable mortgages (the type that are in Fannie and Freddie's mortgage pools), owe more than the value of their homes. For example, in San Diego, many homeowners may owe $400,000 on a house now worth $300,000.
A high percentage of these homeowners will opt to walk away from such homes, in effect making themselves $100,000 and leading to huge losses for the mortgage holders. This process is already occurring, as the foreclosure rate on prime mortgages is rising rapidly and reaching levels seen in the subprime market just a few years ago.
The capital base of both Fannie and Freddie is very limited compared to the amount of debt that they insure. As the foreclosure rate continues to rise, they will both be forced to take large write-offs and will soon be pressing up against the limit of their capital base. Raising the cap on conformable mortgages will hasten the date when this will occur.
Look for analysis in the media from surprised economists when Congress debates the bailouts of Fannie and Freddie.
[note: Frank Nothaft, Freddie Mac's chief economist, was one of the strong advocates of the view that nationwide house prices never fall.]
We can comfortably say that Dean Baker isn't(Economist-Fannie Mae).
