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Discussion Starter #1
Ok, the tread title was to draw attention to this topic and is a little extreme.

Housing fix backfires, raises rates for everyone - Aug. 27, 2008

In a nut shell, some people thought raising the limits on loans the government would buy was a good idea for all...However, it only hurts the average buyer (for the rest of the country).

If Fanny/Freddie are going to take on more risk (buying higher priced loans), they are going to have to make up for it somewhere. So the rates for jumbos has gone down from 6.73 to 6.69. Rates for regular loans has gone up to 6.57 from 6.45. (According to the article)

This means:

650k loan 6.73% = $4,207.25 pmt (old rate)
650k loan 6.69% = $4,190.00 pmt (new rate)

400k loan 6.45% = $2,515.13 pmt (old rate)
400k loan 6.57% = $2,546.71 pmt (new rate)

So the jumbo loan guy saved $17.25 while the regular loan guy pays $31.58 more. Typically, people buying cheaper homes have a greater marginal disadvantage.

Is this fair? Should the government have stepped into the market place and hastly changed the rules? Love to hear what different members think.

Personally, politicans should NOT mess with markets...its like playing with fire.
 

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Couple things:

1. Freddie/Fannie =/= government. Both are shareholder owned.
2. Higher loan amounts don't necessarily mean greater risk. The borrowers credit, job status, current income, location, etc
3. As for the change in rates relative to the rise in purchasable loan size - there is so much volitility in the market currently that it is nearly impossible to pin a single cause with a single effect. The CNN article disects one segment but ignores other factors. There are defaults among prime, sub prime, Alt-A and jumbo loans alike making everything more risking thus a rise in rates across the board. That said, with a new purchasing power behind the 417 and above loans that rate will come down even though rates on sub 417 loan increase. The sub 417 rates have already been benefiting from freddie/fannie purchasing. So yes, mortgage risk is increasing these days driving up the rates, but it's all in a huge correction and providing mortage relief for 417+ is just part of that.

My 2 cents.
 

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Couple things:

1. Freddie/Fannie =/= government. Both are shareholder owned.
2. Higher loan amounts don't necessarily mean greater risk. The borrowers credit, job status, current income, location, etc
3. As for the change in rates relative to the rise in purchasable loan size - there is so much volitility in the market currently that it is nearly impossible to pin a single cause with a single effect. The CNN article disects one segment but ignores other factors. There are defaults among prime, sub prime, Alt-A and jumbo loans alike making everything more risking thus a rise in rates across the board. That said, with a new purchasing power behind the 417 and above loans that rate will come down even though rates on sub 417 loan increase. The sub 417 rates have already been benefiting from freddie/fannie purchasing. So yes, mortgage risk is increasing these days driving up the rates, but it's all in a huge correction and providing mortage relief for 417+ is just part of that.

My 2 cents.
Nice post, Moose.
 

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Discussion Starter #6
^ Just to make sure we are on the same page.

The shareholders do not set rules that Freddie/Fannie play by. Congress does.

Higher loan amounts do mean greater risk. Thats why there has always been a spread between jumbos and regular loans. The spread has typically been about 1.5%

The article is only analyzing FHA qualifing loans. Sub-prime/Alt A/no docs/arm loans have nothing to do with the topic at hand - those loans are whats causing banks to take impairments b/c they hold them.
 

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Regarding number 3 - number of white papers out there questioning the true rate savings enjoyed by the average mortgage borrower. Structuring fees made by advisors to the industry are enormous.

Lowering average borrowing costs is, of course, the stated reason for having Fannie and Freddie's in existence. I say let them go.

Couple things:

1. Freddie/Fannie =/= government. Both are shareholder owned.
2. Higher loan amounts don't necessarily mean greater risk. The borrowers credit, job status, current income, location, etc
3. As for the change in rates relative to the rise in purchasable loan size - there is so much volitility in the market currently that it is nearly impossible to pin a single cause with a single effect. The CNN article disects one segment but ignores other factors. There are defaults among prime, sub prime, Alt-A and jumbo loans alike making everything more risking thus a rise in rates across the board. That said, with a new purchasing power behind the 417 and above loans that rate will come down even though rates on sub 417 loan increase. The sub 417 rates have already been benefiting from freddie/fannie purchasing. So yes, mortgage risk is increasing these days driving up the rates, but it's all in a huge correction and providing mortage relief for 417+ is just part of that.

My 2 cents.
 

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Government didn't hastily step in, it was already there. If you want the government out (which I don't think would be a bad thing, necessarily) then you can expect rates to go up for everyone because they will all require private mortgage insurance. However, adjusting the limit to a government mortgage insurance program to account for higher home prices/inflation/falling dollar, isn't an unreasonable step if the program already existed.

Just my opinion. :)
 

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1. They're government sponsored entities (GSE) and given the new law passed regarding the government's stance to step in and bail them out, they're looking more and more like a gov't entity and less an open market one.

2. According to Fannie Mae, they are packaging these jumbo securities differently than their current offerings. Time and market will tell how much 'risk' will be associated with these securities by the margin of basis points Fannie and Freddie will have to shave off.

3. I concur, the market for these securities change week to week. And the point basis are wildly fluctuating. Lenders will then have to price in the volatility.

Couple things:

1. Freddie/Fannie =/= government. Both are shareholder owned.
2. Higher loan amounts don't necessarily mean greater risk. The borrowers credit, job status, current income, location, etc
3. As for the change in rates relative to the rise in purchasable loan size - there is so much volitility in the market currently that it is nearly impossible to pin a single cause with a single effect. The CNN article disects one segment but ignores other factors. There are defaults among prime, sub prime, Alt-A and jumbo loans alike making everything more risking thus a rise in rates across the board. That said, with a new purchasing power behind the 417 and above loans that rate will come down even though rates on sub 417 loan increase. The sub 417 rates have already been benefiting from freddie/fannie purchasing. So yes, mortgage risk is increasing these days driving up the rates, but it's all in a huge correction and providing mortage relief for 417+ is just part of that.

My 2 cents.
 

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^ Just to make sure we are on the same page.

The shareholders do not set rules that Freddie/Fannie play by. Congress does.

Higher loan amounts do mean greater risk. Thats why there has always been a spread between jumbos and regular loans. The spread has typically been about 1.5%

The article is only analyzing FHA qualifing loans. Sub-prime/Alt A/no docs/arm loans have nothing to do with the topic at hand - those loans are whats causing banks to take impairments b/c they hold them.
Correct, I am with ya:up:
 

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I definitely think both companies serve a purpose and are needed in some form in our market. Be that gov owned or public, they are making home ownership, and renting cheaper. As to the risk of jumbos, along cursaderTBC's lines (fannie securitizaiton), I personally think we'll see them become less risky as the market corrects and that spread will decrease significantly.

There's a lot to consider here that goes beyond paying less for your house. If nothing else, it's certainly an interesting thing to witness.
 

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Discussion Starter #12
Its fun to point out the price of a home mostly has nothing to do with affordability. Its really the payment for a home that has everything to do with affordability.

Making cash available to buyers typically INCREASES the price of a home. That doesnt jive with the purpose of Freddie/Fannie...they are supposed to make homes cheaper to new buyers.
 

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The government steps in because people are idiots, same reason for the Electoral College.

Not to over simplify it, but the main reason we are in this mess, is because homeowners were buying houses they could not afford, and by getting financing which had a low initial interest rates. Those people which could not afford their house if they were to qualify with the conventional financing were bidding up the price of the house, which then started the price increases in the housing market. With higher prices homeowners could refinance their seconds to fund their increased cost of living, e.g. thus creating an artificial bubble. But when the interest rate reset to market rates, then these people had month payments they could not afford. My mother who has been a Broker since the 1970’s kept telling me, that the price increase were due to the baby boomer having empty nests and extra money, and/or getting inheritance and would continue, based upon her attendance to numerous seminars on the topic hosted by economists specializing the real estate markets and other real estate experts. I hold told her this can not continue and people will price themselves out of the market and will not be able to afford a house any more then what they have. I have been saying the same thing about oil prices, where they should be about $100 per barrel, which is same price it was in 70’s adjusted for CPI, e.g. $35 per barrel. Living in California my entire life, I remember house prices of $35k, purchased my first house for $50k while I was still in College and have double and triple. In a comparison between the stock market and house market as long term investment, e.g. over a 10 to 50 year period, the returns were very similar. Basic problem I is unsophisticated investor, looking for the government to bail them out.
 

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As long as the purpose of this thread appears to be blaming California for our woes, anyone have any bright ideas regarding interest-only loans and reducing their influence on house prices? I wonder if we'd see significant price corrections in California, and to a lesser extent elsewhere, if interest-only loans became unavailable...
 

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I agree with the first sentence submitted by KGALGAS, "Not to over simplify it, but the main reason we are in this mess, is because homeowners were buying houses they could not afford"

My wife and I both work as Software Engineers. Our major factor in the price of the house we bought was that the payment would still be affordable on 1/4 of our combined salary. It's still a nice house, just not a wasteful McMansion. It really p!sses me off that I now have to subsidize via my tax dollars those who totally overbought using fixed rate or interest only mortgages. Of course they then had to use the increase in equity to take out a second mortgage, have his and hers BMWs, and live paycheck to paycheck with no buffer.

Live below your means. Pay cash for your Lotus!!! (I'm saving).

Just my humble opinion.
 

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I agree with the first sentence submitted by KGALGAS, "Not to over simplify it, but the main reason we are in this mess, is because homeowners were buying houses they could not afford"

My wife and I both work as Software Engineers. Our major factor in the price of the house we bought was that the payment would still be affordable on 1/4 of our combined salary. It's still a nice house, just not a wasteful McMansion. It really p!sses me off that I now have to subsidize via my tax dollars those who totally overbought using fixed rate or interest only mortgages. Of course they then had to use the increase in equity to take out a second mortgage, have his and hers BMWs, and live paycheck to paycheck with no buffer.

Live below your means. Pay cash for your Lotus!!! (I'm saving).

Just my humble opinion.
+1

I grew up in a 2,000 sqft. house (we were a family of four). It didn't seem small to me. We had one car (for nine years at a time). We went on vacation once, maybe twice a year. I never felt deprived. My Dad paid off his 30yr fixed mortgage in 12 years... I went with him when he went to the bank to have the deed cleared of the lien. He was a happy guy that day.

I don't run into many of my peers that manage their finances the way my Mom and Dad did (and still do). :shrug:

P.S. Paid cash for the Lotus. And the last 7 cars I've owned.
 

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Discussion Starter #17
^ You dont hear too much about mortgage burning parties these days.

However, due to the f'd up tax code...I currently never seeing myself paying off over 20% of a home. There is no reason to do so, no matter how much money you have.
 

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^ You dont hear too much about mortgage burning parties these days.

However, due to the f'd up tax code...I currently never seeing myself paying off over 20% of a home. There is no reason to do so, no matter how much money you have.
Well, you have to compare the "after tax" cost of the mortgage (interest minus interest deduction with no volatility) vs. the after tax return (with volatility) of the assets that you've invested that 80% in... lately that's not been a no-brainer.
 

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Amen Brother! You have hit the nail on the head. No one is willing to wait to pay for anything with cash. It's all about having it instantly. I became a very happy guy the day my house was paid for. My Lotus isn't a pretty one but it's paid for.
+1

I grew up in a 2,000 sqft. house (we were a family of four). It didn't seem small to me. We had one car (for nine years at a time). We went on vacation once, maybe twice a year. I never felt deprived. My Dad paid off his 30yr fixed mortgage in 12 years... I went with him when he went to the bank to have the deed cleared of the lien. He was a happy guy that day.

I don't run into many of my peers that manage their finances the way my Mom and Dad did (and still do). :shrug:

P.S. Paid cash for the Lotus. And the last 7 cars I've owned.
 

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Amen Brother! You have hit the nail on the head. No one is willing to wait to pay for anything with cash. It's all about having it instantly. I became a very happy guy the day my house was paid for. My Lotus isn't a pretty one but it's paid for.

Also there are those us that could have paid cash but are financing it, e.g. levering, spreading the risk and trying to get as much of a tax write-off (tried of paying AMT). When I purchased my house in Jan 07, I had an interest only fixed jumbo at 6.25%, with priniciple payments in 10 years (e.g. kids should out of college by then when the extra payment kicks) and 2nd heloc. When I purchased the Lotus, took it a 3rd against the house as a 5.25% loan which is tax deductible. I kept the cash and had it invested. Thou I did pay cash for the Ferrari.

The problem is people live pay check to pay check, maxed out on their credit cards, with no cushion to fall back onto. We should have about 1 years salary in liquid assets for emergencies. Real Estate is not a liquidate asset, but people were using it as a liquid asset to not finance emergencies or home inprovement, but day to day living expenses. Once the money is spent it is gone.
 
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