The following is a sequential exchange between Representative Barney Frank (D-MA), Chairman of the House Committee on Financial Services, and yours truly.Hopefully the dialog will continue…
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January 24, 2008
Representative Frank,
I'm writing to voice my concern over the recently announced homeowner bailout initiative.
Although the cash refunds and other business investment components of the proposal may qualify as a sound fiscal response to the current economic turmoil, the increasing of the GSE conforming loan limits to $730K is a gross misapplication federal regulatory powers and will continue to perpetuate and even exacerbate the unsustainable conditions that have come about in many of our nation's metro housing markets.
It's important to keep in mind that the majority of the housing bubble conditions occurred in metro areas where the now well known era of dangerously lax lending standards resulted in home prices that are completely disconnected from the basic market fundamentals that guided and regulated affordability for many decades as well as a large cohort of homeowners that cannot afford their homes even under the best conditions.
This is NOT a subprime issue. Understand that "prime" Jumbo homeowners are almost as significantly over-leveraged as the now vilified subprime borrower.
By increasing the conforming loan limits so substantially the federal government is merely perpetuating this unsustainable situation and prohibiting the orderly deflating of the nation's home price bubbles.
If this feature of the proposal is allowed to become law it will unquestionably result in continued speculative behavior and inevitably a harder and more substantial housing price crash in the near future.
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March 5, 2008
We disagree on the question of raising the loan limit for Fannie Mae and Freddie Mac. First, I should note that the loan limit does not go to $730K across the board. In fact, the major problem, in my judgment, intellectually as well as economically with the current limit is that it sets one maximum price for the whole country, when in fact house prices vary greatly geographically. If we have a maximum limit for loans that make sense in Nebraska, it cannot be sensible for parts of California, Massachusetts, Illinois and New York. For Massachusetts, the limit will be $516K- hardly a luxury price in much of Massachusetts. I do agree that we should be welcoming some deflation of house prices, but the pace at which this happens is very important, and having a very rapid decline exacerbated by a freeze in the credit markets for houses in the $400K to $516K range seems to me unwise.
I agree that this is not a subprime issue. But it is an issue that was brought about by the subprime crisis, and by an excessive reaction to it. Your assertion that people who own homes in Eastern Massachusetts that are worth between $417K and $516K are as over-leveraged as subprime borrowers is not accurate according to any of the data I've seen.
BARNEY FRANK
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March 11, 2008
Representative Frank,
Thank you for responding to my initial protest of the Government Sponsored Enterprise (GSE) conforming loan limit increase provision of the recently enacted economic stimulus package but I would like to respectfully challenge some elements of your response.
First, although under prior regulation the Office of Federal Housing Enterprise Oversight (OFHEO) set $417,000 as the maximum sized loan a GSE could purchase for a single family home located in all states and regions except Alaska, Hawaii, Guam and the U.S. Virgin Islands, your assertion that a single limit poses a regulatory dilemma for the nation’s diverse housing markets is incorrect.
It’s important to remember that this limit was intended not to satisfy a sense of fairness for participants in any particular local housing market but rather to ensure the security of the GSEs and prevent unsafe and unsound practices that would run contrary to their statutory charters.
In states and regions where the prior limit of $417,000 was far greater than the typical median single family home price (i.e. Nebraska in your example) homes would still have to meet basic appraisal and other loan qualifying guidelines (also set out by existing statute) thus prohibiting the wholesale distribution of the maximum principal amount.
In states and regions where the prior limit was less than the typical median home price, the $417,000 combined with a healthy 20% down-payment provided for a significant $520,000 home purchase and homebuyers who needed more would be expected to be of the means not requiring affordable housing assistance.
Keep in mind that, as a basic guide, only 12 of the 145 metro area home markets tracked by the National Association of Realtors (NAR) has EVER recorded median home values in excess of $417,000.
Next, it’s important to consider that under the strict interpretation of prior regulatory guidelines the conforming loan limit should have, in fact, decreased for 2007 and again for 2008 as the Federal Housing Finance Boards (FHFB) national average house price declined on a year-over-year basis for both preceding October results.
In the face of the national price declines though, OFHEO took it upon itself to devise a new and substantially more complex strategy for determining the conforming loan limit that sought to mitigate any potential market instability that could arise from an abrupt decrease.
But even under the new guidelines the limit IS scheduled to decrease for 2009 and in all likelihood will continue to require a downward adjustment as the FHABs October average home price continues to decline.
How does Congress intend on accounting for this phenomenon?
Aside from the folly of maintaining a regulatory guideline that only gets amended up and never down, Congress has created a scenario whereby 125% of a greatly decreased median home price may in fact soon be materially LESS than the original $417,000.
Lastly, what I believe Congress and the President have done by enacting this provision is to introduce a substantial amount of uncertainty into an already wounded and fragile marketplace for agency securities.
Investors in agency securities not only know that the changes that have been enacted are unsound, they are now beginning to recognize the significant credit losses that will inevitably be associated to securities produced under even the prior, more restrictive, regulatory environment.
This recognition of instability has already affected GSE operations resulting in the highest yields on agency securities seen in 22 years thus driving up costs for all home-borrowers.
Although Congressional and Executive mandate apparently provide a dynamic and flexible environment for generating regulatory statute that suits the perceived whim of constituents (particularly in an election year), the “law of unintended consequences” remains largely rigid as it appears now quite clear that the main focus of Congress and the Administration later this year will be the federal bailout of Fannie Mae and Freddie Mac.
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P.S. As for $417,000 to $516,000 being suitable for eastern Massachusetts remember that the conforming loan limit was $300,700 in 2000 and $359,650 in 2005 and that GSE loans combined with “piggyback” second liens provided plenty of stimulus for our local market bubble.
Massachusetts is not immune and in fact will undergo substantial socio-economic stress in the coming years as home prices don’t deflate slowly as you suggest but in fact continue to re-price sharply downward.
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