Housing Crisis - There’s Light at the End of the Tunnel
For the first time in about three months, I’m feeling some confidence in the housing and credit markets recovering. Subsequently, I believe a severe recession will be avoided for now. I’ve warned about anyone attempting to call bottom, but I definitely see a light at the end of the tunnel.
The Fed’s rate cuts earlier this week and subsequent activity in the bond market have made both long and short term mortgage rates highly attractive, especially for refinances. The one missing ingredient to this formula was higher loan limits to help high cost real estate markets, chiefly California.
Today a bipartisan stimulus proposal was reached by Congress that besides sending out checks to most taxpayers, will provide a huge stimulus to the housing market by raising the conforming loan limit in high cost areas to $625,500 and make qualifying for FHA loans easier.
I believe this is exactly the right combination to revive the declining housing market and prevent additional foreclosures. Those homeowners who are simply walking away from expensive loans now have a real incentive to remain in their homes. This will reduce the number of foreclosures, thus preserving home prices and more importantly stave off job losses and a possible recession.
The deal also includes a short-term increase to $625,500 from $417,000 in the size of mortgages that can be purchased and guaranteed by government-sponsored mortgage finance firms Fannie Mae (FNM) and Freddie Mac (FRE, Fortune 500). Those increased limits would expire on Dec. 31.
In addition, it would include a reform of the Federal Housing Administration.
The proposal would lower home-buyers’ down-payment requirements when getting FHA loans, increase the cap on loans eligible to be FHA-insured and lower origination fees It is believed those changes could help lenders make loans to risky borrowers who have found it difficult to arrange for home financing since the collapse in the market for subprime mortgages last summer.I’ve always said there were “outs” to a housing collapse and government intervention was one of them. Some people on the Internet have harsh criticism for raising loan limits. I believe if the market supports higher limits, government shouldn’t place an artificial ceiling on them.
Whether today’s stimulus package gets approved into law is still up in the air a little bit, but I think it will receive wide support and it will be effective if it’s implemented in time. It’s definitely a shot in the arm for California and other high priced real estate markets.