And California Gets It Again

We all know that Shrub has never been a friend to strongly-democratic states such as California or New York, especially to the populous cities where he isn’t popular. Well, he just did it again.

According to the papers (there’s another good summary in the Washington Post), Shrub announced some steps to help in the current mortgage crisis:

  • He said he would take steps to allow the Federal Housing Administration (FHA), which insures the mortgages of low- and moderate-income homeowners, to guarantee the loans of some borrowers who are more than 90 days behind in payments of the loans.
  • He would seek to temporarily change a provision of the tax code that now penalizes homeowners who refinance their mortgages to reduce the size of their loan payments or who lose their houses to foreclosure.
  • He also called on Congress to pass his proposal to reform the FHA, in part by raising those loan insurance limits to $262,000 in most states and $417,000 in pricier areas.

It is this last one that is significant. Shrub is proposing raising the FHA insurance limit, basically to bring it in line with the limits of the loans that can be handled by Freddie Mac and Fannie Mae. With a 20% down payment, that’s just over $500K… well below the median prices of housing in these higher price areas.

The problem is that once you are above the Fannie Mae/Freddie Mac limits, rates are becoming exhorbitant. This is because below those limits, these quasi-government agencies will buy the loans, ensuring the brokers of their needed secondary markets. Above the limits, however, private or market purchasers must be found. With the liquidity crisis, that’s harder, which is what is raising the rates. What needs to be done reformation of more than just the FHA insurance limits: there needs to be reform of these Fannie Mae and Freddie Mac limits. That’s why I support the move by the California Assn of Mortgage Brokers to increase the Fannie Mae/Freddie Mac limits. If California was declared a high-cost state, it would place it among select regions where the conforming rate limit is about 150% higher. Other high costs areas include Alaska, Hawaii, Guam and the U.S. Virgin Islands. Such a move would make mortgages in LA, SF, and NYC more affordable.

However, Shrub is not supporting the increase in the conforming loan limit to realistic values (say, 110% of the median home value in a given county). I wonder if it is because most of these “high cost” areas tend to be areas that support the other party. I’m sure politics has nothing to do with it.


[Apologies to tsgeisel for deleting the earlier version of this post. I needed to find the correct facts.]