After reading an article in Monday's Chronicle indicating that many people holding the pricy mortgages common to the Bay Area would not be able to take advantage of low-cost refinances, Rep. Jackie Speier, D-Hillsborough, amended a bill scheduled for a House vote.
"After reading your article, I thought, this isn't going to work for California," Speier said."I've drafted an amendment so that rather than being limited to whether the loan was conforming at time of origination, it will be based on (whether it's conforming at) the time of (modification), which will take the limit up to $729,750 in high-cost areas. This should make more people in the Bay Area eligible."
Speier's amendment addresses an aspect of the plan that encourages mortgage services to modify loans to make them more affordable for struggling borrowers. The modifications are supposed to reduce monthly payments to 31 percent of a borrower's income for five years; they also could include lowering the principal or refinancing the loan.
The amendment says that loan modifications must be available to loans that are "conforming," meaning those that can be securitized or guaranteed by Freddie Mac or Fannie Mae. The conforming loan limit was $417,000 until July 1, 2007. About 60 percent of homes purchased in the expensive Bay Area in 2005 and 2006 were bought with higher-cost "jumbo" loans above $417,000; about 30 percent of homes in California were jumbos in those years, according to MDA DataQuick. The limit is now $729,750 in high-cost regions, including most of the Bay Area.
I will put this in perspective. President Obama wants his mortgage bailout plan to stop at any loan amount no more than $417,000. That's because that is the limit on Fannie/Freddie loans. In many ritzy areas like San Francisco, New York, and Los Angeles, such loan amount limits would price out many folks that are in trouble. That sprung Rep. Jackie Speier, D-Hillsborough, into action. She has added an addendum to allow "high cost" areas to allow loan limits as high as $729,750.
The first problem is this. If this amendment passes, then the tab on this bailout is no longer $275 billion but something much higher. Second of all, if Fannie/Freddie is forced to take on hundreds of thousands of higher loan amounts, that increases the risk to both those entities. There is a reason why Fannie/Freddie set loan limits. The main reason is so their portfolios aren't overweighted with a few large loans. If hundreds of thousands of loans at $600,000 and more suddenly wind up in their portfolios, the adverse risk of default on those loans is greater than on loans of $100,000, $200,000, and $300,000.
The second problem is that it is even harder to justify that only those that "played by the rules" are helped when loan modifications are done on loans as high as $729,000. Are we really to believe that these folks were merely trying to live the American dream, or maybe, they were living up the American dream? If someone is having trouble affording their McMansion, is it really the government's responsibility to give them a loan they can afford?
There is another larger point that is relevant to the overall arc of this mortgage bailout. Rep. Speier is one rep in one community. She saw an opportunity and now is adding an addendum so that her constituents are covered by this bailout. How long before others get into the same act and try and add addendums that covers their contituency. A mortgage bailou is a boondoggle. As such, either Speier's constituency is paying or receiving. She wouldn't be a good rep if she didn't make sure her constituents aren't receiving. No legislator would be. As such, watch for many more such amendments as other legislators attempt to make sure that their constituency is covered under the mortgage bailout. As such, watch for the price tag to go up exponentially.