The new year, 2009, did not rectify this, but instead enlarged it for the first time ever since Fannie and Freddie began setting the conforming loan limits each year. They chose approx. 20 states to become "high cost" states to mirror the high cost other states, Alaska and Hawaii. Everyone was to move their limit to $625,500 from $417,000 except Hawaii who moved to as high as $726,000 for a single family residence. But the rules were not for each state, but for selected counties within a state and not all to $625,500. Confusing? In California you can have different limits in the same "atmosphere" within given cities. Beverly Hills has a limit of $625,500, but not Santa Barbara or La Jolla. Santa Barbara is in the low $600,000 range and La Jolla is $550,000+. Scotsdale, Arizona is $417,000 and hundreds of other high real estate valued cities are also limited to $417,000. Who decided to do this by counties and why?
Every county has huge diversions in the property values within their jurisdictions but probably none so wide as in California. Los Angeles county has the high values you would find in Beverly Hills, Bel Aire, Malibu, Palos Verdes etc. and the lows you would find in parts of the San Fernando Valley, East Los Angeles, around the harbor and several other places. Trying to weave ones way through this jigsaw puzzle is trying at best. What also adds to the problem is the lack of a vibrant jumbo market, meaning people with $417,001 mortgages haven't a viable alternative for home financing. And how fair is this to other states such as Minnesota and New Mexico who remain at $417,000 for the entire state?
The next big problem is the lack of stated income loans that were part of the mortgage fabric for decades. What do you do for those who acted based on a rule, never had a problem or a late payment and now the rule is changed and they cannot participate?
One actual example should point out the problem. An independent businessman who became a financial broker, working from his house, found it impossible to refinance and lower his payment. His house appraised for $975,000, down from his last appraisal of over $1 million. He has a 780 credit score and over $500,000 in liquid assets. His loan was $399,000 and he simply wanted to lower his payment. Because he didn't show enough in taxable income he was declined. Was this really a risky loan? Are you convinced he couldn't make his payments?
Before you make up your mind lets look at what actually happened. Fannie Mae and Freddie Mac have an automated underwriting system (AUS) that would have approved him in a second up until they made a major change late last year. Evaluating his high credit score and low loan to value, plus large reserves, their only requirement would have been a CPA letter saying the borrower was self employed for over two years. When that changed thousands of self employed people were in trouble. It has been replaced with one year tax return that will allow up to the low 60% debt to income ratio. If you earn $15,000 gross a month you can have a monthly debt load of over $9000 a month and be accepted for a loan.
Are these new ways of operating a product of the hysteria whipped up by the media who prints first and discovers afterward? Should politicians who have left us in the largest financial mess we have seen in many decades dictate the rules that they don't understand? I believe the turnaround in real estate is being hampered by those who are here to help and won't be fullly underway until they are out of the way. What do you think?
Roger Schlesinger's Mortgage Minute is heard on hundreds of radio stations and daily on the Hugh Hewitt radio show and Michael Medved shows. Roger interacts with his hosts and explores the complicated financial markets in order to enlighten his listeners and direct them along their own unique road to financial freedom.