Publication Date: Friday, April 18, 2008
An answer to the subprime mess?
Loan-limit lifeline promises more than delivers
Many looked to the federal economic stimulus package to throw a lifeline to a mortgage market mired in the subprime slime, but when details of the new loan limits emerged on March 17, some felt they'd instead been thrown a fraying thread.
"For a borrower, it's just not the lifeline they needed," said Samuel Spinella, a certified mortgage-planning specialist with Alpine Mortgage in Menlo Park.
The stimulus package, signed into law on Feb. 16, raises the limits of "conforming" loans, which can be purchased by major mortgage institutions Fannie Mae and Freddie Mac or insured by the Federal Housing Administration. In high-cost areas such as Santa Clara County, this translates to a maximum loan of $729,750, a significant increase from the previous $417,000 limit.
High real estate values in Palo Alto and surrounding areas have required many borrowers to take out "jumbo" loans that exceed the old limit and carry much higher interest rates because they aren't backed by the major mortgage players.
Spinella and others hoped to see restrictions and rates comparable to standard conforming loans when the new limits were implemented.
"I was expecting conforming, not a hybrid of conforming," he said, explaining that higher interest rates and strict limits on loan-to-value ratios (the ratio of the loan amount to the total property value) massively reduce the utility of these loans to borrowers in need.
"It's not going to be the significant bail-out that was expected," he said, "and the reason being is if the loan-to-value is going to be capped at 75 percent, and there's a 100 percent loan on the property that you need to adjust so you can afford it, it's not doing anything for the person who's in a bind. The rate will only take up 75 percent of that loan.
"I really think that if they kept the same conforming guidelines, then that would have helped tremendously. As it is, I think it's going to help maybe 10 percent of the people who actually need it."
Susan McHan, founder and CEO of Opes Advisors in Palo Alto, agrees that the immediate value of the economic stimulus package did not meet all expectations, but while it isn't a "bail-out," she is supportive of the stimulus plan and believes the limit increases will do their job, given time.
"The pricing still doesn't look very attractive to borrowers right now," said McHan. "The reason for that is, even though Fannie Mae and Freddie Mac are backing these loans, they need to sell them to someone in the marketplace." Because of the uncertainty in the current market, she said, a lot of extra cushioning is added to the price of those offerings. "Any immediate snap or impact we were expecting -- that's not going to happen for awhile. Investors have to get used to things first. I do think these loans will make a difference. It's just not a spigot that turns on right away."
Eric Trailer, a partner with Absolute Mortgage Banking in Palo Alto, is even more enthusiastic about the loan increase.
"I see it as a real shot in the arm for the overall market," Trailer said. "It enables borrowers to get a lower price loan than would be available at a jumbo level, with only 10 percent down. What I've been seeing is right in the middle pricing wise. It's spurring a lot of people who might not be getting in the market to do so, and it's making it more affordable for them. I am not at all disappointed in the pricing that has come out, and as more and more players come into this market, the pricing may actually get better. I'm very encouraged."
So is now the time to get into the market? Trailer thinks so.
"I would say yes for those who are looking. As the economy gets better and rates get higher, it may be a wash for the future. Taking advantage of it sooner rather than later seems to be the more prudent thing to do."
While loan-limit increases may be a boon to buyers of new single-residence homes, people with grander dreams of building new properties may need to keep sleeping through this market.
"Construction lending in this particular environment is probably one of the most challenged areas of residential lending right now, because of the risk associated with it," Trailer said. "What differs about construction lending is that it depends on what the future value of a project is going to look like. In this climate, people are very unsure of future values, so it's difficult for a bank to feel comfortable. Many lenders have pulled back." Until there is more stability in the market, new construction loans will be difficult to get.
Spinella, McHan and Trailer all agree the market is a thorny place at any time, especially now, and anyone who is ready to enter it must be cautioned against jumping in alone and uninformed. While marching into the nearest major bank may seem the simplest approach, it rarely yields the best loan.
"The big banks can make certain exceptions if they want to," McHan said. "If you're a direct customer of the bank and you're asking for something outside the norm, then it might be better to go to a big bank. They may want you to open a certain account, or have some other way that you can do something for them so they can do something for you. But if your needs are normal, work with a reliable broker who can shop around. They have access to niches where they can do much better."
Spinella echoed the importance of a reliable broker. "The most important thing to know about the market right now is you absolutely need to be working with a professional who understands it," he said. "It's very difficult for a borrower to know the current market because things are changing so quickly. Even professionals are getting out because of it."