When you see a lender to take out a loan for a home, the bank either retains the loan in house, or sells in on the secondary mortgage market. . Banks “bundle” loans together and sell them off to investors. The secondary mortgage market only buys loans, they don’t start them. The secondary mortgage market is really important because lending laws allow banks to only lend out a certain percentage of their holdings. If banks can’t sell their loans, then they can’t lend more money out
Fannie Mae and Freddie Mac are FOR PROFIT corporations. People often get confused and think they are government run, but they are not. They are government sponsored. They have federal oversight, but are separate from the federal government. Fannie Mae and Freddie Mac are allowed to maintain trillion-dollar portfolios in order to encourage homeownership.
Why is this important? Well if banks can’t lend any more money, no more home loans. Without this credit system, we are back to the “old fashioned” way of doing things which is cash. If buyers had to pay cash for homes, home values would plummet. The concern is that two of the largest entities on the secondary mortgage market, Fannie and Freddie, have lost a combined 41 BILLION in market value this year so far.
Currently, Fannie and Freddie are limited to loans of $417,000 per purchase. There has been some talk about raising that loan limit. This limit is important since jumbo loans exceed this amount. This means that jumbo loans are being held by banks. By holding these jumbo loans, they are restricting the amount of money they can use for lending to buyers. What this means is that they are have stricter guidelines to get credit. What they have is limited so they are giving it to the very best buyers.
In California, where home prices are astronomical compared to Salem, Oregon, many buyers have jumbo and non-conforming loans. These buyers are unable to refinance using conforming rules since many of the mortgages are more than $417,000. As a result the markets based on these types of loans are falling apart. The home buyer does not have the ability to refinance the loan, and they can’t sell the home for what they owe. They are upside down.
It is expected that 2.2 million households will end in foreclosure by 2009. Freddie Mac is close to their mandatory capital surplus as required, in order to remain in business. As home prices of more desirable areas and markets falls to correct for the jumbo loan problem, it will continue to trickle down to the smaller markets.
The legislature is in a difficult position. Intervene or let market forces correct the problem. If they intervene and fuel liquidity for the jumbo loan market, they may stall a housing recession. If they don’t, they may just be prolonging the inevitable, which is a decline in property values.
For more information about Salem Oregon real estate market conditions, please feel free to call or email.