Congress Passes Economic Stimulus Package; Will it Help Housing?

Get ready for jumbo conforming.

The U.S. Congress yesterday passed and sent to President George Bush a $168 billion economic stimulus plan that would boost the GSE conforming limit to as much as $729,750 through the end of this year. The plan would also raise FHA lending limits to the same level for high-cost areas.

More than a few commentators speculated that boosting the conforming limits was the real impetus behind the bill. From Andrew Jeffrey at Minyanville:

Only the most Pollyannaish would argue that mailing checks to the spending vacuum that is the American consumer is an effective way to bolster the economy, so the true motivation for the unusually quick congressional action is for Fannie and Freddie to step in and support housing values.

The NAR, not surprisingly, hailed the bill as a “major stimulus for the housing industry,” and said the higher GSE limits would reduce foreclosures by 210,000, while higher FHA loan limits would allow nearly 200,000 homeowners to refinance and avoid foreclosure.

Via the Associated Press, the consensus seems to be that raising the limits will provide some help in areas such as California:

Right now, borrowers in expensive areas are “really stuck between a rock and a hard place,” said Mark Vitner, senior economist with Wachovia Corp. Raising the caps, he said, will result in a refinancing boom for those properties.

“We’re more likely to see an immediate improvement at the upper end than we are at the lower end” of the housing market, he said …

… Fannie Mae CEO Daniel Mudd said last week that over the past few years home prices rose so high in parts of the Northeast and West Coast, hiking the loan limits became necessary.

“The notion that we’re talking about vacation homes in Colorado is not correct,” Mudd said at an investor conference in New York. “We’re talking about working-class homes.”

The impact, however, may be more limited than some would otherwise hope; a lack of equity among many existing homeowners could be a significant hurdle, with the WSJ’s Development blog citing Peter Ogilvie, president of the California Association of Mortgage Brokers, as saying “many California homeowners may not qualify for the terms.”

Both GSEs have tightened lending guidelines recently amid the industry downturn, and in particular have pulled back on maximum loan-to-value ratios in many of the nation’s hardest-hit housing markets. Housing Wire reported in December of last year that Fannie Mae had instituted new restrictions on LTV ratios in declining market areas, pushing LTV and CTLV maximums down five percentage points.

With home values declining, even borrowers who aren’t quite underwater yet may have a tough time qualifying; and new borrowers in high-cost areas will be required to come up with a greater down-payment than during the go-go period of the recent housing boom.

But the largest unresolved issue — and one that many primary mortgage market participants have not considered — is the so-called TBA trade (see earlier coverage here). Secondary market activities here will impact borrower rates moreso than anything else.

Sources suggested to HW on Thursday that the SIFMA committee engaged in determining whether conforming jumbos will trade as TBA is expected to keep the newly-conforming loans out of TBA trades, although no decision had been announced when this story was published.

If the newly-minted conforming loans at higher limits are kept separate, “jumbo borrowers [will] only get the benefit of guarantee in market, while the prepayment hickey and higher GSE guarantee fees are tacked onto their rate,” said one source via email.