Below are details for the changes that are occurring because of the gradual phasing out of the Congress stimulus measures. This will most likely cause interest rates to rise in addition to winding down Fannie Mae and Freddie Mac. This will also in effect increase the deposit needed for loans to 10% and temporary loan limits for jumbo loans from $729,000 to $625,500, set to adjust downwards October 11, 2011. Thsi will pass on the jumbo loans to the private sector and should cause interest rates to rise also. This is a good reason to purchase property now before rates increase and jumbo loans become less affordable.
The stimulus measures that Congress enacted at the end of last year are starting to take hold. Those measures included reducing payroll taxes by 2%, allowing businesses to write off 100% of their investments this year, and of course the extension of the Bush tax cuts. Thanks to those measures, unemployment is slowing dropping, and GDP is increasing at a nice pace (last year 2.8%, this year 3.4%).
The Fed will continue to implement quantitative easing through June of this year by buying up to $75 billion of Treasure notes each month.
The Fed has certainly done all it can to keep rates low, but we are about to see a big change that will probably result in higher rates before you know it. Basically, the Administration (through Treasury Secretary Timothy Geithner) has acknowledged a need to “restructure” the mortgage market, also known as “Winding down Fannie Mae and Freddie Mac”. Here is a synopsis of the effect a wind-down could have on affordability of home ownership:
1. The Administration has made it clear that it sees a greatly reduced role for government involvement in the mortgage markets
2. Part of this is due to political pressure from Republicans, and part of it is due to the fact that these are failed institutions that have cost taxpayers about $160 billion in bailout funds
3. The Administration has proposed a few different scenarios, but basically redefined the government’s role as assisting some low income borrowers (and renters), at the same time encouraging the majority of borrowers get money from the private sector.
4. It’s highly likely that rates will increase as the risk of loss shifts from the public to the private sector.
5. It’s also highly likely that Fannie Mae loans will require at least 10% down, and that the Temporary Loan Limits ($729k in San Francisco) will be lowered back to $625,500. Those limits are set to expire in October 2011 anyway, and it’s unlikely the current Congress would extend the higher limits. By reducing the limits for both conventional and FHA loans, the private markets will be forced to provide jumbo loans at higher rates.
6. The government’s role would eventually be limited to consumer protections and oversight.
7. A real shift in focus: Geithner’s report ends with: “The Administration believes that we must continue to help ensure that Americans have access to quality housing they can afford. This does not mean, however, that our goal is for all Americans to become homeowners”
8. The changes in structure will happen slowly (5 years or so), so that our fragile real estate recovery is not threatened.
Source of information:
Natasha Lovas
Senior Mortgage Advisor
Guarantee Mortgage
415-694-5544
