Now that I have your attention…. In a normal economy, most people who sell their houses (with the exception of those relocating for lifestyle or career reasons) plan to move up to bigger, better, or more centrally-located properties. In today’s market, however, the absence of available financing, especially jumbo loans, has virtually wiped out the move-up market.
A few banks have tried to fill the void with portfolio ARMs. These are adjustable rate mortgages, fixed for 3, 5,7 or 10 years, which are funded by the banks’ money and remain part of their portfolios. Portfolio ARMs are helpful to borrowers but insufficient to fill the demand for loans.
From out of the wilderness come the lenders calling for Fannie Mae and Freddie Mac to raise the limits on the loans they buy, a.k.a. “conforming loan limits”. Raising the limits on conforming loans would breathe new life into the move-up market. The current limit for a conforming loan in the lower 48 states is $417,000, except for certain high priced areas where it is $625,500. The loan limit for Alaska and Hawaii is 50% higher, or $625,000. I’ve been to both states in recent years and see no reason for the discrepancy.
In 2007, lenders called for Fannie and Freddie to increase their loan limits to match those in Alaska and Hawaii. It appeared to be a fait accompli, but Congress instead authorized a temporary increase in the conforming loan limits for single-family residences in just a handful of states. Within these states, loan limits were raised to $729,750 in a few select areas, but to $500,000 or even less in others. Texas and Minnesota, among many other states, weren’t granted any conforming jumbos. Having a committee determine the loan limits for an area based on rules decided by quasi-government organizations -- Fannie Mae and Freddie Mac-- doesn't make sense. Just because an area is granted a limit of $729,750 doesn't mean that every borrower and every property gets that limit.
Loan to value of the property is still determinant. So why exclude some properties or areas? As an example, Fannie Mae and Freddie Mac assign a different loan limits to each of three upscale California cities, Santa Barbara, Beverly Hills, and La Jolla. The common denominator is that most of us couldn't afford a house in any one of them anyway.
Appraisals are based on averages of prior sales, which can distort current appraisals one way or the other by failing to take into consideration the most recent trends. If the current recent in a particular area is strongly up, the lag in appraisal values can keep the area from rebounding as quickly as it otherwise might. It was encouraging to note, however, that as part of the increase in loan limits to a maximum of $729,750, Congress provided an alternative measure of 125% of the median home value, although I haven't seen a lender that will go over 105%, within the “metropolitan statistical area,” whichever is less.
Adding even more downward pressure to home values, the FHA (Federal Home Administration) has a new rule about condominiums, effective November 1st of this year, requiring that a condo be approved, not a "spot approval", in order for a buyer to qualify for an FHA loan. Currently, if a buyer who can afford only 3.5% down wants to buy a condominium in a project that hasn't been approved, we get a "spot approval.” The approval process is long and difficult, so in reality, a unit that previously required 3.5% down now will require 20% down. What do you imagine is going to happen to the price of condominiums in unapproved projects? Do we really need more properties going down in value?
I cannot conclude this article without mentioning the Home Value Code of Conduct (HVCC), one of the silliest rules ever promulgated. Under this new rule, the appraiser is not allowed to know the amount of the proposed loan, unless it is a purchase. Everybody, including the appraisers, was blamed for the housing demise. Understandably, appraisers are concerned about overstating anything. Can you imagine that appraisers would do anything but value every property as low as possible? You cannot believe the rationale appraisers use for their findings when lenders refute them. The example that sums it up best is this: An appraiser found two condominiums that matched my borrower’s model. Each was priced $75,000 higher than my borrower’s unit had been appraised. Nevertheless, the appraiser refused to change the valuation of my borrower’s unit. Why? Because six months earlier my borrower had purchased the unit for the price at which it was now being appraised, and according to the appraiser, this was a declining area, so the condo couldn't be worth more. With this kind of logic, how can a declining area ever change?
Remember those lenders coming out of the wilderness calling for Fannie and Freddie to raise the loan limits at least to $625,000 as in Alaska and Hawaii? Why not do it for all the states and get this real estate market moving again? We cannot restore property values with uneven lending limits and rules. If we can value every clunker that was on the road at $4500, what is wrong with raising every state’s conforming limit to $625,000? In my opinion, it is not only needed, but also vital for our recovery.