Jumbo gamble for county home sales part of stimulus plan

Will it work?

That was the debate Friday in the Sonoma County real estate community over a key provision in the federal economic stimulus package that would make it easier and cheaper to take out big home loans.

The plan would temporarily raise a key lending limit, freeing many buyers from the necessity of using high-interest "jumbo" loans to buy homes in Sonoma County.

Many agents and mortgage brokers seemed optimistic that the measure could be just the incentive some buyers need to re-enter the housing market, firm up home prices and bring the long-predicted bottom into sight.

"I think it's great and important and it's really going to get some people off the fence and into the market," said Timothy Hedges, manager of the Prudential California office in Sebastopol.

Others, however, are skeptical the changes will do anything more than help a small number of high-income buyers afford larger homes, doing little for the vast majority of homeowners struggling to hold onto their houses.

"This is the stupidest plan ever," said Chris Thornberg, founding partner with Beacon Economics. "You're making it cheap for high-income people to borrow more money. Great!"

Thornberg, formerly with the UCLA Anderson Forecast, was one of the first economists to warn of a housing bubble in California and the consequences of a real estate slump. Despite the recent drop in home values, Thornberg said prices remain too high for most people to afford.

Prices have dropped 24 percent since peaking at $619,000 in August 2005. In December, the slowest month on record, the median home price was $466,500.

With unemployment on the rise, incomes aren't going to increase any time soon, Thornberg said. As a result, housing affordability can only increase if prices drop further, he said.

The plan would allow government-sponsored Fannie Mae and Freddie Mac to buy mortgages up to 75 percent more expensive than the current $417,000 limit. This, in turn, is designed to make it cheaper for people to buy homes or refinance mortgages in Sonoma County and other regions with high home prices.

Sonoma County's housing slump deepened this fall and winter as skittish lenders tightened access to nonconforming or "jumbo" loans, a term used to describe loans that are too big to be sold to Fannie Mae and Freddie Mac.

These loans are often necessary in Sonoma County, where it took a $50,000 down payment to buy a typical home in December with a conforming loan. Many buyers don't have that much money, forcing them to turn to jumbo loans.

But jumbo loans are more expensive than conforming loans. Interest rates on loans above $417,000 today are running about 1.25 points higher than their conforming counterparts, said John LeCave, owner of Fountain Grove Mortgage of Santa Rosa.

A 30-year fixed jumbo loan Friday was 6.65 percent, while similar conforming loans were 5.38 percent, LeCave said.

The higher rate is a reflection of the fact investors consider nonconforming loans to be riskier than conforming loans, which require rigorous documentation of income before Fannie Mae and Freddie Mac will purchase them.

The impression that the federal government will stand behind the loans is also a key reason they are considered safer.

While jumbo loans once made up about 70 percent of the loan volume in LeCave's office, they are now about 30 percent. But if loans of that size are easier and cheaper to get, LeCave thinks it could result in significant additional lending activity, both new sales and refinances.

"This would open up a whole level of liquidity that we don't have today for those jumbo loans," he said.

LeCave said he received "a flurry of calls" from people Friday morning asking whether the new cap would make it easier for them to refinance their homes.

It's far too soon to say how it will impact individuals because the bill could undergo significant changes, he said. While Democrats and Republicans in the House have agreed to the outlines of the stimulus plan, it still must be approved by the Senate and President Bush.

Under the current proposal, the cap on conforming loans would be raised to as much as $730,000. The new limit would be increased to 125 percent of the median price of a particular area.

How that median is calculated remains unclear. If it were based on the December median for Sonoma County, for example, such loans could be as high as $585,000. If based on the annual 2007 median of $552,500, the loans could be made up to $690,000.

Raising the cap to just $625,000 could have a profound impact on the market, according to an analysis by the National Association of Realtors, which has been pushing for such changes for two years.

Nationwide, home prices could increase 2 percent to 3 percent and 348,000 additional homes would be sold, resulting in $44 billion in increased economic activity, the group claimed.

The tighter regulations of the conforming loan process would be a good thing because only those who truly qualified for the loans would be approved, said Mary Trupo, spokeswoman for the real estate trade group.

"This does not mean that more people can make bad decisions," Trupo said.

Raising the lending limit won't help people refinance if they bought at the peak in 2005 and now owe more on their loans than their homes are worth, LeCave said.

But renewed buying activity in the $500,000 to $700,000 range of the market could have a domino effect as those sellers -- some of whom may have been tempted to overreach -- could take their proceeds and go bargain hunting, stimulating the lower rungs of the market, LeCave said.

"Anything that can stir up any activity in this environment is good," he said.

You can reach Staff Writer Kevin McCallum at 521-5207 or kevin.mccallum@pressdemocrat.com.