Scotsman Guide - February 2012 Residential Edition

Data
By Svenja Maarit Gudell

SENIOR ECONOMIST, ZILLOW

Decoded

chAnging conForming-loAn limits mAy hAve limited impAct

Conforming-loan limits have been enthusiastically debated in the past few months. Since the housing crisis began, legislation aimed at keeping mortgage credit available has increased the maximum loan amount for government-backed loans to as much as $729,750 in high-cost markets. after lowering fannie Mae and freddie Mac conforming-loan limits in 250 counties, as well as federal Housing administration (fHa) loan limits in 669 counties, Congress moved to restore the fHa loan limits two weeks after they changed this past Oct. 1.

Why are these limits so important? Loans that fall within these limits have cheaper interest rates. but how much impact are the new fannie and freddie limits having and how much impact would the lower f Ha limits have had on consumers?

Critics have argued that the housing market will be affected significantly and negatively by the lower limits of fannie and freddie because many consumers may be forced into a lower-priced home to stay within conforming-loan limits. Zillow found that only 0.75 percent of homes in the continental U.S., or 2.5 percent of homes in continental high-cost counties, are potentially affected by this change, however.

Zillow covers 168 of the 250 counties in the continental U.S. that are subject to lower limits. We found that, although limits fell by 10.2 percent on average in these counties, home values fell by 23. 9 percent from January 2008, when these higher limits were established initially, to October 2011. On average, buyers are getting more home for their money despite lower limits. Of the 168 counties that Zillow covers, 20 counties had limits drop by a larger percentage than home values, however. The majority of these counties are located in Massachusetts, New york and Virginia.

Let’s consider the actual rates that homebuyers are getting for properties that are more than the new limits but less than the old ones. We looked at the rates these newly minted jumbo-loan applicants were quoted for primary-residence purchases with a 30-year fixed mortgage and a downpayment ranging from 15 percent to 25 percent. We then compared those quotes to the average rates received by applicants with loans that met the expanded conforming limits (see graph below). There was only a difference of 52 basis points. That equates to around $215 dollars a month on a $700,000 purchase.

for fHa loans, Zillow covers 389 of the 669 counties that had limits decrease on Oct. 1, but have since been increased again. On average, their limits fell 14. 4 percent, although home values fell by 23. 5 percent from January 2008 to October 2011. Of those 389 counties, 88 had their limits decline more than their home values declined. The majority of these counties are located in Colorado, Connecticut, Massachusetts, New york, New Jersey, Virginia, Pennsylvania, North Carolina and Washington.

2011 AVERAGE RATES QUO TED FOR 30-YEAR
FIxED MOR TGAGES
Source: Zillow Mortgage Marketplace

Oct 2 Oct 30 Nov 27

Below previous limits but above new limits = Jumbo Loan that previously was an Expanded Conforming Loan

although more buyers would be affected by lower fHa limits, the impact still would be relatively small, because the limits dropped by a lower percentage than home values in most counties. for fannie and freddie conforming-loan limits, however, it’s evident that the overall impact is limited because relatively few homes nationwide will be affected, and the few affected borrowers still will have access to mortgage credit, just at somewhat higher rates.

because these lower limits are not an issue for the overall health of the real estate market and were always intended to be temporary (but have been repeatedly extended), it becomes difficult to see the public-policy benefits of subsidizing rates for mortgages as expensive as $729,750.

svenja maarit gudell joined Zillow’s industry-leading economics and analytics group in 2011. She produces real estate data and performs econometric analysis, including foreclosure and negative equity research, on more than 150 markets. Gudell received her Ph.D. in finance from the University of rochester. She previously worked for analysis Group in boston and the federal reserve bank of New york as an assistant economist in the International research Group. Contact Zillow at (206) 757-2701.

QA&

Peter Bell PETER BELL, PRESIDENT AND CEO NATIONAL REVERSE MORTGAGE LENDERS ASSOCIATION BY JENNIFER E. GARRETT

How would you describe the current state
of the reverse-mortgage market?

It’s a challenge to work with a product that is a grow-ing-balance mortgage against a declining-value asset. Volume has contracted recently as a result of diminished home values and investors leaving the proprietary market. The combination of demographic trends as well as the wealth profile of households points to a very bright future for the reverse-mortgage industry, however. There are challenges to that from some consumer distrust of the product. Some of it stems from negative reporting in the media, and some of it comes from a lack of understanding of how reverse-mortgage products work.

What are you keeping an eye on this year?

The Consumer financial Protection bureau is required to produce a study of the reverse-mortgage market and turn that over to Congress in July. fHa is continually assessing the performance of the HECM program and will probably put out a proposed rule to add in a layer of financial assessment and under writing for prospective HECM borrowers.

Why is this rule change being proposed?

We’ve been doing HECMs for 20 years now, and there are some people who get a HECM and then ultimately find that they don’t have the means to meet their obligations. Once upon a time, a reverse mortgage was written just on the value of the property and the age of the borrower because there are no payments. but there still needs to be sufficient cash flow within the household to be able to pay taxes and insurance and meet all day-to-day needs. fHa will come out with a proposed rule probably sometime in the second quarter, and then the final rule will come out later in the year. In the meantime, some companies have begun to add in an assessment of this sort, so NrMLa put out guidelines this past October so [lenders] would have some ideas to work with.

What will reverse-mortgage volume
look like this year?

There’s continued decline in property values in most markets, but once prices stabilize and begin an upward trend, we’ll see a pick up. In October 2010, fHa introduced a new version of the HECM that they call the HECM Saver, which has a much lower upfront mortgage insurance premium in exchange for a slightly lower pay-out. borrowers get 10 to 18 percent less, but to people who need less money or who are using it just as a standby reserve, it makes the product much more attractive. We expect to see a lot of growth in that area.