Did you know that states have housing finance agencies to promote affordable housing, too? And guess what? Fannie and Freddie help them. From Freddie Mac:
Mortgage Revenue Bonds
Bond Purchase Activity Supports Community Development
Mortgage Revenue Bonds (MRBs) are tax-exempt bonds that state and
local governments issue through housing finance agencies (HFAs) to help
fund below-market-interest-rate mortgages for first-time qualifying
homebuyers. Eligible borrowers are first-time homebuyers with low to
moderate incomes below 115 percent of median family income.Benefits to Housing Finance Agencies (HFAs)
In purchasing MRBs, Freddie Mac works with HFAs in two ways:
- As a credit enhancement: Originating
lenders pool the mortgages into securities guaranteed by either Ginnie
Mae or Freddie Mac and sell the securities, rather than the whole
loans, to the issuing HFAs.- As investor: As part of its corporate investment program, Freddie Mac purchases MRBs issued by HFAs.
Does anyone know about the magnitude of these programs. One claim is that across the nation, they have helped a few million people get cheap mortgages. Anyone out there know if the bonds ever default? Or if they might soon? Any idea if the program has expanded or shrunk in the last decade?
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Yes, some of the loans default.
But why aren't we discussing the increase in the Jumbo Mortgage limit (on loans that Fannie and Freddie could buy) to three-quarters of a million dollars, and why didn't we discuss the inclusion of commercial mortgages and related securities in the original bailout bill, and why haven't we discussed the last minute change in the bill to include other, non-mortgage securities, and why aren't we discussing the Fed's entry into the corporate bond market?
It's not that I don't think mortgages aimed at low income people play a role. I just don't think that's remotely the whole story, and I'm very skeptical that it's even the most interesting chapter.
Martin,
What percentage of jumbo loans have defaulted as compared to subprime? There-in lies the answer.
Keep in mind that due to leverage, a large percentage of these mortgages don't have to default to cause a large loss in the portfolio of mortgages.
I don't know, but one jumbo loan could be worth four or five mobile home loans, even more since the "stimulus package".
I don't know much about how these things are packaged and "securitized", but it doesn't take a rocket scientist to figure that the securitizer operates on a thin margin. Maybe he's buying six percent mortgages and selling a five percent bond, but any profit he imagines could be needed to meet his obligation to the bond holder if his mortgages default. How does he know how much he can pay himself? The temptation to underestimate the risk must be huge.
A Jumbo mortgage is one over $417,000.
The median price for a manufactured home in 2007 was $65,100.
So the smallest Jumbo mortgage is over 6.4 times the total price of the average manufactured home.
TL – it just goes to show how unsustainable the American model is. We should look eastward for inspiration.
Source.
If that 14% vs 48% is based on mortgage count, and not on mortgage face, then the Jumbo dollar exposure may dwarf the other categories.
Data? Anyone have date?
To answer your questions; 1) no I am not aware of one ever defaulting. In addition to the Fannie/Freddie or Ginne guarantee, each mortgage in the bond also has either private mortgage insurance or FHA, VA or RD.
It would be hard for an investor to lose money in one. That being said, the loan level default risk is real. Although, my experience is the underwriting guidelines are tougher and the post-closing review, conducted by the individual state Housing Finance Agency, is excruciating. Finally, most HFA's have unusually strenuous recourse provisions against the originating lender.
Because of the above 2) I would not expect the default rates in MRB's to accelerate at a faster rate than similar loans not securitized in MRB's.
3) Congress most recently expanded the program in 2000. From the National Association of State Housing Agencies website:
"Each state’s annual issuance of Housing Bonds and other so-called private activity
bonds, including industrial development, redevelopment, and student loan bonds, is
capped. Congress in 2000 increased the private activity bond cap by 50 percent and
indexed it to inflation. The 2008 limit is $85 times state population, with a state
minimum of $262,095,000."
Crusader,
We should look to the Swiss. Swiss mortgages are a trip:
You get the polity-cohesiveness benefits of ownership (the Swiss are three or four linguistic groups who have maintained a state without splitting up for a good long time); most of the investment capital (two-thirds) is held by conservative financial entities who no one wants to be taking imaginative risks, thus freeing up individual capital for more ventursome activities; the financial benefits of home improvements and penalties of home neglect are enjoyed or borne by the person dwelling in the home so you avoid perverse renters' incentives.
We could do a lot better than 30-year amortizing loans, and the laboratories of the world are rich with results.
Guys,
The size of the Jumbo market alone doesn't tell you anything (try buying a home in california or the NYC area without a jumbo loan). The Default rate matters – specifically, the change in default rates.
I've got data from June of last year
Subprime default rate: 13.43%
Jumbo loan default rate: 0.37%
In June 2006, subprime defaults were nearly half – around 7% and Jumbo defaults were around 0.23%.
So, I think the subprime mortgage problem dwarfs the Jumbo loan problem because the default rates are higher and the increase in default rates is so much bigger.
As of February, it's $729,750.
Isn't a mortgage above the Jumbo limit "subprime" by definition?
Isn't a mortgage above the Jumbo limit "subprime" by definition?
No. "Subprime" refers to the credit worthiness of the borrower. Usually, those people also happen to be not so rich – sometimes because of the bad choices that lead to bad credit in the first place. People who qualify for jumbo loans generally don't fall into any of the "protected" groups the CRA and other government programs target.
I don't know how much to worry about the Jumbo loan limit increase. It happened after credit tightened significantly as an attempt to keep rate adjustments down (all Jumbos are adjustable rate as far as I know). But even before the increase in the limit, the default rate was low (the borrowers had better credit and more to lose) and didn't increase that much, and Jumbos require a downpayment, making default more costly.
BTW, Martin, I answered your post on options, fat tails & Nassim Taleb on the other thread.
Here's a story on jumbo loans written back in February when the limit rose to three-quarters of a million. Half of all jumbo loans are concentrated in a single state, California, and they're probably heavily concentrated within California too.
I'm always shocked when Californians tell what they pay for even modest homes. Prices can be two, three, even four times what I'd expect to pay for a similar property in my neck of the woods. The Case-Shiller index for San Diego is down over 30% from its peak in '05, and a half million dollar house is not extraordinary at all there.
When you're suddenly $150,000 in the hole, the temptation to default must be overwhelming. So what if you ruin your credit rating for a few years? How much is a credit rating worth? If you move, tighten your belt and live without credit, you might be in the black long before you dig your way out of such a deep hole. If you must move to find work, you hardly have a choice.
Martin: I am with you there; the price of homes there is staggering. My wife and I periodically watch those "_____ this House" shows on TLC and the like, and they always seem to have homes in CA that are essentially termite mounds with aluminium siding and a human infestation issue, yet are "valued" at 400,000$ (that was one we saw the other week.) It is insane. It seems to me that if you are worried about the value of your house going to hell and needing to leave your mortgage, the real answer is "Move the hell out of CA."
And since half of the Jumbo Loans are in CA, that's presumably a potential Black Swan scaring the hell out of a lot of investors.
Pensions lose $2 trillion
But that's the real story, and we should be discussing it more frankly at this point.
"Unlike Wall Street executives, America's families don't have a golden parachute to fall back on," said Rep. George Miller, D-Calif., the panel chairman. "It's clear that their retirement security may be one of the greatest casualties of this financial crisis."
This statement should scare the hell out of anyone who values economic freedom over the promises that the Biggest Generation made to itself. This generation only blindly followed the lead of the Greatest Generation, except for their fertility, but that's beside the point. The Greatest Generation didn't need to strangle the Biggest Generation with confiscatory rents to keep its promises.
Wall Street CEOs are self-deceiving rent peddlers, and they're as predatory as any other politician, but if the D.C. politicians decide to "rescue" the Biggest Generation from the Wall Street politicians, they'll smother our economy with rents, because both factions of the Political Party are playing the same game. The only difference is that Wall Street politicians can't levy taxes and otherwise constrain our options. They must ask their comrades in D.C. to do it for them.
And the CEOs, Congressmen, Federal Executive officers, Judges and politicians of every stripe are overwhelmingly baby boomers now. They must only decide collectively that their "securities" are "just" to starve the rest of us of real investment opportunities by imposing heavy rents on us.
Russ and Don and probably most of the rest of us here are baby boomers too.
and they always seem to have homes in CA that are essentially termite mounds with aluminium siding and a human infestation issue, yet are "valued" at 400,000$
Ha! In the NYC area those homes are valued at $2 Million or more. It's the land that you're paying for and supply is very limited relative to demand in these dense urban areas. If your job demands you live in a certain area, you don't have much choice. C'est la vie.
Do financial research jobs really demand that people live in a certain area anymore? In the past, the synergistic value of having all the records in one place arguably made NYC a valuable place to live, but all information is everywhere at once now.
For the last decade or so, I heard from financiers that my job (software development) was easily offshored to India. I always wondered why their jobs weren't more easily offshored.
Do financial research jobs really demand that people live in a certain area anymore?
For most jobs in finance, it is. There are pretty massive economies of scope.
Besides, finance jobs aren't the only jobs in NYC. There's the fashion industry, advertising, publishing, the bodega owners who feed them, the dry cleaners who keep them looking like bums, etc.
"dry cleaners who keep the FROM looking like bums."
'scuse me.
But why aren't we discussing the increase in the Jumbo Mortgage limit
Because it's moot.
1) The limit increase hasn't even been in place for a year so we don't have a good guess at the default rates yet.
2) It was put in to prop up home prices. And as an excuse to get the credit market moving – credit was slowing and people thought it was because the loan principal was too high to conform for F&F. But home prices continued to fall anyway. There are so few of these new jumbo conforming loans that the effect is close to nil. That 700K house in California in 2006 is now listed at 450K; the loan would qualify under the limts before the increase.
The problem isn't loans written in 2007 (there were a lot fewer of them), it's loans written from 2003-2006.
That's why the increase is not moot. At least two Black Swans spook the market for mortgage backed securities. One is increased lending to poor credit risks that, we're led to believe, was a unknown to or misunderstood by buyers of these bonds, even though it was widely discussed.
These mortgages are relatively small denominations but defaults are higher in number; however, the larger frequency of defaults was predictable, regardless of falling home prices, and these securities are designed to account for this risk in theory.
The other Black Swan is an unexpectedly large number of defaults on higher priced homes purchased by people with presumably better credit histories, because house prices fall more than expected, thus leaving many people deeply in negative equity. These home owners weren't poor before the price collapse. They're poor because of the collapse.
A third unanticipated event is either willful deception, or a mass hysteria of self-deception, by the central planners of the finance industry constructing these products, and I don't simply mean Barney Frank.