This measure will simply help those who have money get more property.
I would have to disagree with you here. It will cause an jump in prices on houses in the 500k to 800k region because of the reason you stated earlier:
While the savy buyer measures value of a home with regards to market conditions, pricing, etc… many a buyer, dare I say a majority simply look at the mortgage payment.
Most of the savy buyers know the value of money and will notice the price getting a bit more unreasonable in the 500K to 800K region. What the measure will do is ‘sink the hook’ in the mouths of any green investors or green potential buyers that only look at the house payment and believe that a full turnaround is imminent. The people with money will wait until these people get hit too. The have the money in the first place because they were patent enough to not get sucked into the previous hype-up of prices.
My opinion on the increase on loan limits is that it is a suckers play. It pulls people out of original purchase jumbo loans into a refi, which makes the loans recourse. It gets the fence sitters that are on the edge of their seats and don’t have the experience to see the sucker play into the market to try to prop up house prices.
The second part of it is that it is a suckers play on all taxpayers because Fannie Mae, Freddie Mac are backed by US taxpayers should the loans default sufficiently to cause either of the institutions to have liquidity problems. It allows banks to that have loans that would qualify, sell them off to either of the institutions, potentially at a profit because of the present interest rate drops. Banks walk away with the money, Fannie Mae, Freddie Mac (aka US taxpayers) take the risk.
As for liquidity problem, there is more than enough liquidity. The problem is that the banks know their own investment portfolio (SIVs) look like crap and suspect another bank’s are just as bad or worse.. so they will not lend to each other without significant risk premium.. but the banks want cheap money for high risk just like they have been getting in the past. The second part of the problem is that the banks etc with the CDOs/MBSs or mortgage paper do not want to mark to market because it will really hurt their bottom line (they will have resolve the drop in assets to net income.. -100Bil anyone?). We are seeing a few billion here and there. The total amount is involved is estimated to be close to $500Billion or more. What the rapid drop in interest rates does is inflate the ‘asset value’ of the CDOs/MBSs until the holders can find another sucker to hold the bag. Rough example following:
Lets say we are a bank and have $1Mil in MBSs yielding 6% ($60,000/yr). Now we discover 50% of the loans are bad ($500K) and the recovery rate is 50% of assets on bad loans. This means you have $750K of real assets(MBS) returning $30K/yr (50% went bad so they don’t yield a return). Effectively we now have a $750K asset yielding 4%. Be we are greedy.. we want our $1Mil back.. how do we do this? Well if the risk free rate of return (Treasury) is reduced to 3% or below, $1Mil returns $30K @ 3%.. which looks just like our crap! If we can achieve good ratings after allowing for bad loans.. we (the bank) can hot potato the MBS to someone else at our original cost. We the bank don’t lose. The dodgy debt is someone else’s problem.
Looking at the above, you might be able to estimate where the fed rates will drop to before stabilizing. What is needed is the % of loans going bad, recovery rate as a percentage of original loan value and what the MBSs/CDOs were originally yielding. The real formula to use is an amortization formula.. but thats harder to follow. The above paragraph is easier to follow and reflecting on all of this is making me cranky again (And the Friday beer is wearing off.. needed one for this week).. so I am going to hit the hay.
NOTE: The above applies to the sub-prime, Alt-A paper. Many of these were refi’d into NegAms.. which are projected to start resetting late 2009 and hit full swing 2010. I can’t project what will happen here because these loans start out underwater. Some were refi’s which makes them recourse. I call this period the ‘all Hell breaks loose’ period.
