Home Builders offer second master bedrooms, kitchenettes and separate entrances.

(Updates with builder confidence index in 14th paragraph.)

Nov. 16 (Bloomberg) -- Kevin Barnes figures buying a newly built home saved him money. That’s because he chose a model with a second master bedroom for his mother-in-law.

“She’s a free babysitter,” said the 42-year-old chemical salesman, who in June purchased a four-bedroom house in Orlando, Florida, built by KB Home. “Day care costs about $200 a week.”

The Barnes residence is part of a growing line of new homes marketed to multigenerational families, a category that increased by 30 percent from 2000 to 2010, according to the U.S. Census Bureau. KB Home, Lennar Corp. and PulteGroup Inc. are among the builders that offer models with second master bedrooms, kitchenettes and separate entrances.

Those features may help lure buyers at a time when new homes are selling at a record slow pace and more Americans are living with extended families, said Megan McGrath, a homebuilding-industry analyst with MKM Partners LP.

“When builders are still fighting for every sale, hitting on something that resonates with your local demographic can make a difference,” McGrath, based in Stamford, Connecticut, said in an e-mail.

The number of households comprising three generations rose to almost 5.1 million in 2010 from 3.9 million a decade earlier, according to the Census Bureau. An estimated 51 million Americans, or 16.7 percent of the population, lived in homes with at least two generations of adults in 2009, up from 42 million in 2000, the Pew Research Center said in an October report.

Niche Area

“This is a niche area that appears to be solid and growing,” Stephen Melman, director of economic services at the Washington-based National Association of Home Builders, said in a telephone interview. “It’s a demographic thing.”

The increase in multigenerational families won’t stimulate demand for new houses because it represents a slowing of household formation, Lawrence Yun, chief economist for the National Association of Realtors, said at a Nov. 11 conference in Anaheim, California. It’s also not clear the trend will continue once the economy recovers, he said.

“The past few years is really about economic hardship,” Yun said. “More people in multigenerational households just means there are more people under one roof.”

Falling Household Formations Household formations fell to about 515,000 in 2009 from as high as 1.48 million in 2004, according to the Census Bureau’s American Community Survey. The number of formations in 2010 was about 981,000. The percentage of men aged 25 to 34 who live with their parents grew by almost a third during the past five years, as so-called boomerang children returned home from college or the military or lost their jobs, census figures show.

At the same time, aging baby boomers are moving in with their children to save money and share the task of child care.

“Clearly it’s not all because of the bad economy,” D’Vera Cohn, a senior writer with Pew, said in a telephone interview from Washington. “But it accelerated during the bad years.”

Those “bad years” hammered new home sales, which are expected to fall to 305,000 this year, according to the National Association of Home Builders. Last year, 323,000 new single- family homes sold, down from a peak of 1.28 million in 2005 and the fewest since the Commerce Department began tracking data in 1963, as unemployment lingered around 9 percent and discounted prices for foreclosed homes made it tough for builders to compete.

Homebuilder Confidence

A gauge of confidence among U.S. homebuilders climbed this month to the highest level since May 2010, a sign the outlook for construction may be stabilizing. The National Association of Home Builders/Wells Fargo index rose to 20 from 17 in October, the Washington-based group said today. Readings below 50 mean more respondents said conditions were poor.

While building homes for extended families won’t increase aggregate demand, it may spur interest in new designs that appeal to buyers in an era of economic stress, said Robert Shiller, a Yale University professor of economics and the co- creator of the S&P/Case-Shiller home price indexes.

“The bubble years before 2006 seemed to be a time when people were indulging in conspicuous consumption,” Shiller said in a telephone interview from his New Haven, Connecticut, home, which he has opened to student boarders for the past two decades. “These days, we don’t feel so good about showing off like that. If you have a relative who’s been unemployed for a year, it doesn’t feel the same. So you buy a house that has quarters for your mother and that feels better.”

Home Within Home

A steady stream of shoppers visited Lennar’s Next Gen models, dubbed “the home within a home,” at a grand opening in the Rosena Ranch community in San Bernardino, California, on Nov. 5. The houses have two front doors, two kitchens, two washer-dryer sets and two living rooms.

Prices start at $318,890 for the three-bedroom main house and built-in suite with an option of one or two bedrooms. The smallest home in the development -- a 1,404-square-foot (130- square-meter), one-story house -- starts at $241,070.

Dan Alvarez, owner of a risk-management company in Rancho Cucamonga, California, said he was attracted to the option of buying the house with a separate unit for his three college-aged children.

No Dorms

“If I were to move into a place like this, it eliminates having to rent another place if you’re funding college,” he said during a tour of the model home. “You wouldn’t have to pay for their college dorms.” For Alvarez, 60, the drawbacks are the location -- more than an hour’s drive from his daughter’s college in Orange County -- and the weak local real estate market.

The San Bernardino-Riverside County region had the fifth- highest foreclosure rate among metropolitan areas with a population over 200,000 in the quarter ended Sept. 30, according to RealtyTrac Inc., a real estate information service in Irvine, California. Home starts are likely to fall to less than 1,000 in San Bernardino County this year, compared with 10,416 in 2005, according to Houston-based MetroStudy, which tracks housing construction.

Mary and Marty Nachman, retirees from Apple Valley, California, said the two-unit Lennar home may be preferable to the house they bought in 2007 in one of Pulte’s Del Webb senior communities, where their children can stay for only two months a year because they’re under age 55.

Moving Back Home

“With this economy, the way things are right now, there are a lot of young adult children who need to move back home for a while,” said Mary Nachman, 68, a retired juvenile court officer and mother of five. “We already know people in our community who’ve had kids move back in, but they’re doing it against the rules and doing it covertly. If they get turned in, their kids will have to leave.”

While duplexes, granny flats and guest houses have a long history, the two-homes-in-one models are new for mass-market builders, said Jeff Roos, president of Lennar’s Western region. Lennar, the third-largest U.S. builder by revenue, unveiled its first Next Gen homes in September in the Phoenix area and expects to offer them in as many as 40 communities by the end of this year, Roos said.

Next Gen homes are being built in Phoenix and California’s Inland Empire and Central Valley, and soon will be constructed in Las Vegas as well. Those regions have among the highest foreclosure rates and biggest price declines since the U.S. housing bubble burst, increasing the need for new designs to boost sales, Roos said.

Competing Well

“We think it will compete very well versus a foreclosure or distressed sale,” he said in a telephone interview from his office in Aliso Viejo, California. “It allows proximity and independence.”

Ronald Cosey, a San Bernardino County government auditor, said he wished the Next Gen model was available when he bought a house last year in Rosena Ranch, so he could either accommodate his mother or take in a renter for extra income.

“In this economy, everyone is struggling,” Cosey, who lives alone, said during a visit to compare the model home with his own. “Maybe you can find a foreclosure cheaper, but with this new home, with the extra income, it’s definitely a benefit.”

Pooling Resources

Zoning rules and building codes prohibit the Next Gen homes from having a full stove in the smaller unit’s kitchen, a restriction to discourage rentals, Roos said. The personal finance benefits may occur as extended families pool resources for down payments and mortgage bills, said John Burns, chairman of John Burns Real Estate Consulting in Irvine, California.

“It’s a real opportunity for homeownership for people that couldn’t get it otherwise,” he said in a telephone interview. “Imagine a young couple that can’t afford a home by themselves but mom can help them. That works out really well.”

The U.S. homeownership rate was 66.3 percent as of Sept. 30, down from a high of 69.2 percent in June 2004, the Census Bureau reported Nov. 2.

Pulte, the nation’s largest builder by revenue, offers new homes with stand-alone smaller units or the option of converting garages to “casitas,” the Spanish word for small houses. Other Pulte features to accommodate extended families include ground- floor master bedrooms for elderly family members who can’t climb stairs.

Doggie Couches

Some Pulte model homes include a room decorated with a doggie couch, chew toys and “dog eye chart” with pictures of a bone, a cat and paw prints -- stretching the extended family concept beyond the human species.

“We heard from our buyers: We have pets and we consider them a part of the family, and we’d rather have space that’s allocated to the pet, just like we would a bedroom for a child,” Scott Thomas, Pulte’s director of architecture, said in a telephone interview from Bloomfield Hills, Michigan.

“Gateway cities” on the coasts and along the Mexican border are prime markets for multigenerational housing because first- and second-generation immigrants are the most likely to live with extended families, said Richard Gollis, a principal at the Concord Group LLC, a real estate consulting firm in Newport Beach, California.

According to Pew, 25.8 percent of Asians, 23.7 percent of blacks and 23.4 percent of Hispanics live in multigenerational households, compared with 13.1 percent of whites.

Luxury-home builders are among developers tapping into the multigenerational trend, Gollis said.

Toll Brothers Inc., the largest U.S. builder of luxury homes, is now offering kitchenettes and second master bedrooms as an option in its “midsized” houses, which are as small as 3,200 square feet, said Tim Gehman, director of design for the Horsham, Pennsylvania-based builder.

At Lambert Ranch in Irvine, California, a 169-lot subdivision where sales are scheduled to begin in April, the New Home Co. plans to offer houses starting at about $900,000 that can be connected to form a two-unit compound, said Joan Marcus- Colvin, vice president for marketing and design at the Aliso Viejo, California-based company.

“It’s not a new concept,” she said in a telephone interview. “But for today’s market it hasn’t been introduced.”

The median price of an existing single-family house in the Orlando area was $128,200 in June, according to the Florida Association of Realtors. That’s when Barnes paid about $280,000 for his 2,565-square-foot house with the additional master bedroom, in KB Home’s Mabel Bridge community, to accommodate his 71-year-old mother-in-law, Linda Roulley.

Her quarters provide space to relax and watch television, and she has privacy from Barnes, his wife, their 3-year-old son, six cats and a Labrador retriever mix, Barnes said.

“We’re not putting her in a box,” he said. “She likes her independence.”

Roulley also enjoys spending time with her grandson, Ethan, and takes comfort knowing she can depend on her daughter Leanne to take her shopping or to the doctor, Barnes said.

There’s just one downside, Barnes joked: “I’ve got my mother-in-law living with me.”

--Editors: Daniel Taub, Christine Maurus
To contact the reporter on this story: John Gittelsohn in Los Angeles at johngitt@bloomberg.net
To contact the editor responsible for this story: Kara Wetzel at kwetzel@bloomberg.net

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U.S. Congress moves to raise FHA loan limits - strong likelihood

WASHINGTON | Mon Nov 14, 2011 11:11pm EST

(Reuters) - Republicans and Democrats in the U.S. Congress on Monday agreed on a measure that would increase the maximum size of mortgage loans that can be insured by the Federal Housing Administration, a key funding source for U.S. home loans.
The measure to raise the loan limits backed by the FHA still has to pass the Republican-led house and Democrat-controlled Senate before it becomes law, but the agreement by a bipartisan panel of lawmakers from both chambers indicates a strong likelihood of final approval.

The limits, which vary by real-estate markets, fell at the end of September for mortgages insured by the FHA, as well as government-controlled Fannie Mae and Freddie Mac . The higher loan limit was temporarily raised for Fannie, Freddie and the FHA during the financial crisis and it automatically dropped back to $625,500 on Oct. 1.

The agreement reached among House and Senate leaders excludes those loans guaranteed by Fannie and Freddie, which provide about half of the funding of all U.S. residential home loans. The deal would only impact FHA's loan limits, restoring the cap for mortgages the government insures to as high as $729,750 in high-cost real estate markets through 2013.

The agreement follows a polarizing debate over the size of mortgages the federal government should back. The measure to increase the legal limits on the size of mortgages the FHA can insure was included in a bill to fund a large swath of government programs, from food inspection to law enforcement, that is seen as must-pass legislation for many lawmakers.

The legislation containing the amendment extends funding on a temporary basis for many government programs through Dec. 16, giving Congress additional time to finalize funding levels.

House and the Senate must pass the bill by Nov. 18, when current funding expires.

The Commodity Futures Trading Commission, tasked with implementing several reforms of the Dodd-Frank financial overhaul, is given a budget of $205 million, roughly 50 percent below what the Obama administration requested.

Budget battles have raised the possibility of a government shutdown twice so far this year, as Republicans have pushed for steep spending cuts. Aides say they do not anticipate that this bill will lead to another round of budget brinkmanship.

The divisive debate on the loan limits will continue to play out this week as lawmakers push to pass the short-term funding measures. The Senate had pushed a measure that would raise the maximum size of a home loan backed by Fannie Mae, Freddie Mac and the FHA to $729,750.
The House did not include the higher limits in its bill to fund federal agencies through next September, instead favoring to keep the cap at $625,500.

The reduction in the loan limit was part of an effort to start reducing the government's footprint in the mortgage market and revitalize the role of private lenders -- an effort supported by President Barack Obama and Federal Reserve Chairman Ben Bernanke, as well as some Republicans in Congress and the FHA itself.

Critics, including several prominent House Republicans, opposed the higher loan limits because they believe the government's extensive role in the housing market needs to be curtailed to protect taxpayers.

However, some Republicans, including several from California and New York, argued the housing market was still too weak to lose government support in higher-cost neighborhoods.
Some analysts say only a sliver of the overall U.S. housing market, about 2 percent to 3 percent, was impacted by the recent decrease in the limits. But some housing advocates believe a higher limit is warranted given the persistent weakness in housing.

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‘Put-back’ relief at center of HARP mortgage fix.

Fewer lender appraisals translate into lower costs for borrowers, analysts say

WASHINGTON (MarketWatch) – Lenders hoping they won’t need to repurchase faulty mortgages when they refinance home-loans are focusing on a new Obama administration effort that wants to help them out.

At issue is the White House’s Home Affordable Refinance Program, which seeks to provide refinancing options to underwater borrowers who have no equity in their homes, as long as their mortgage is backed by Fannie Mae and Freddie Mac, the government-controlled housing giants.

So far the HARP program has helped far fewer borrowers than its proponents estimated -- roughly 894,000 borrowers since Aug. 31. -- and many less than the estimated 11 million U.S. homeowners who owe more than their homes are worth.

To reverse that trend, on Oct. 24 the Federal Housing Finance Agency announced a revised program, with more details expected to be released by Tuesday, Nov. 15, the same day the agency’s chief, Edward DeMarco, is scheduled to testify about the program on Capitol HIll.
Read about how the revised HARP program targets the hardest-hit borrowers
FHFA estimates that by the end of 2013, HARP refinances will double. Regulatory observers say that DeMarco has made enough tweaks to the program that his prediction may actually come true.
“We are of the opinion that there are enough changes to the program that bank servicers could really change their behavior, and this could be one of the first times that the administration has under-promised and over-delivered,” said Brian Ye, analyst at J.P Morgan Chase & Co.

The put-back risk

A major change focuses on the “put-back risk” -- the possibility that the bank originating or refinancing the loan will have to repurchase it from Fannie and Freddie because the underwriting violated the two mortgage giants’ guidelines.
Some big lenders have been hesitant to participate under the original HARP program, in part, because of their concerns about assuming the put-back risk.

However, according to Federal Housing Finance Agency officials interviewed by MarketWatch, lenders participating in the revised program will have relief from defects associated with the underwriting and documentation of the original loan.

Specifically, the new regulations eliminate the need for the lender to obtain an appraisal in many markets. Not only does this limit costs to borrowers and simplify the refinance process, but it also gives lenders put-back risk relief, the FHFA officials said.
Previously, lenders were responsible for the appraisal value and in situations where the value they provided for the loan was inaccurate, they had to repurchase the loan from Fannie or Freddie.

With the new approach, if Fannie and Freddie stipulate the property was worth a certain amount, as it will be doing on many new HARP-refinanced properties, it will be more difficult for the two mortgage giants to say the lender misled them on the property value, the government officials said.
Manoj Singh, a special advisor to the Collingwood Group and former Freddie Mac Senior Vice President of Pricing and Securitization, said giving lenders put-back relief is a major step forward to convincing big lenders to take part in the program.

“I think there may be some exceptions in the case of fraud, but it is a major step and it is big relief for the lenders and will encourage them to go ahead and crank up their HARP machines,” said Singh.
Singh said even the extension of the deadline will help the program succeed. The revisions extended the end date for HARP until Dec. 31, 2013, for loans sold to Fannie and Freddie on or before May 31, 2009.
Sarah Wartell, executive vice president of the Center for American Progress, said eliminating the appraisal also will be helpful for borrowers, many of whom have been reticent to spend the money on an appraisal, which can cost up to $400, and then later find they don’t qualify for HARP.

Expanding the eligibility pool

Rick Sharga, executive vice president at Carrington Mortgage Services, said he did not believe it was unrealistic for the program to double the number of HARP refinancings.
He said the program’s new plan to expand the number of eligible underwater borrowers will help. The original program only allowed borrowers to refinance with a mortgage that was at most 25% more than the home’s current value. With the changes, all underwater borrowers can participate, even homeowners with deeply underwater mortgages.
By Ronald D. Orol, MarketWatch

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82 Percent Of Refinancing Homeowners Maintain Or Reduce Mortgage Debt In Third Quarter

Real Cash-Out Volume at 16-Year Low

MCLEAN, Va., Nov. 7, 2011 /PRNewswire/ -- Freddie Mac (OTC: FMCC) released the results of its third quarter refinance analysis showing homeowners who refinance continue to strengthen their fiscal house by maintaining or reducing their mortgage debt.
News Facts

• In the third quarter of 2011, 82 percent of homeowners who refinanced their first-lien home mortgage either maintained about the same loan amount or lowered their principal balance by paying-in additional money at the closing table. Of these borrowers, 44 percent maintained about the same loan amount, and 37 percent of refinancing homeowners reduced their principal balance.
• "Cash-out" borrowers, those that increased their loan balance by at least five percent, represented 18 percent of all refinance loans; the average cash-out share during the 1985 to 2010 period was 46 percent.
• The median interest rate reduction for a 30-year fixed-rate mortgage was about 1.2 percentage points, or a decline of about 22 percent in interest rate. Over the first year of the refinance loan life, these borrowers will save about $2,500 in interest payments on a $200,000 loan.
• The net dollars of home equity converted to cash as part of a refinance, adjusted for inflation, was at the lowest level in 16 years (third quarter of 1995). In the third quarter, an estimated $5.3 billion in net home equity was cashed out during the refinance of conventional prime-credit home mortgages, down from $6.3 billion in the second quarter and substantially less than during the peak cash-out refinance volume of $83.7 billion during the second quarter of 2006.
• Among the refinanced loans in Freddie Mac's analysis, the median value change of the collateral property was a negative 7 percent over the median prior loan life of almost five years. In comparison, the Freddie Mac House Price Index shows about a 25 percent decline in its U.S. series between September 2006 and September 2011. Thus, borrowers who refinanced in the third quarter owned homes that had held their value better than the average home, or may reflect value-enhancing improvements that owners had made to their homes during the intervening years.

Quotes
Attributed to Frank Nothaft, Freddie Mac vice president and chief economist:

• "The typical borrower who refinanced reduced their interest rate by about 1.2 percentage points. On a $200,000 loan, that translates into saving $2,500 in interest during the next 12 months.

• "Savvy homeowners are taking advantage of some of the lowest fixed-rates in more than 60 years to lock in interest savings. Fixed-rate mortgage rates hit new lows during September, with 30-year product averaging 4.11 percent and 15-year averaging 3.32 percent that month, according to our Primary Mortgage Market Survey."

Get the latest information from Freddie Mac's Office of the Chief Economist on Twitter: @FreddieMac

Cash-out Refinance Analyses Information
These estimates come from a sample of properties on which Freddie Mac has funded two successive conventional, first-mortgage loans, and the latest loan is for refinance rather than for purchase. The analysis does not track the use of funds made available from these refinances. The analysis also does not track loans paid off in entirety, with no new loan placed.

• Quarterly Cash-Out Statistics [XLS] [XLS]
• Quarterly Cash-Out Volume [XLS] [XLS]

Related Links
Current and Previous Cash-Out Refinance information
Freddie Mac House Price Index (FMHPI (SM))
Primary Mortgage Market Survey (PMMS®)
Average Mortgage Rate Outstanding
Press Release Archives
Freddie Mac was established by Congress in 1970 to provide liquidity, stability and affordability to the nation's residential mortgage markets. Freddie Mac supports communities across the nation by providing mortgage capital to lenders. Over the years, Freddie Mac has made home possible for one in six homebuyers and more than five million renters. For more information, visit www.Freddiemac.com.

SOURCE Freddie Mac

For further information: Chad Wandler, +1-703-903-2446, Chad_Wandler@freddiemac.com

The financial and other information contained in the documents that may be accessed on this page speaks only as of the date of those documents. The information could be out of date and no longer accurate. Freddie Mac does not undertake an obligation, and disclaims any duty, to update any of the information in those documents. Freddie Mac's future performance, including financial performance, is subject to various risks and uncertainties that could cause actual results to differ materially from expectations. The factors that could affect the company's future results are discussed more fully in our reports filed with the SEC.

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Should Fannie, Freddie Write Down ‘Underwater’ Mortgages?

California Attorney General Kamala Harris became the latest elected official on Thursday to call on Fannie Mae and Freddie Mac to write down loan balances for borrowers who owe more than their homes are worth.

Ms. Harris is seen as a key figure in an effort by the Obama administration and state attorneys general to forge a $25 billion settlement with banks over foreclosure-processing abuses. She bolted from the talks in early October, calling the proposed settlement inadequate, but has been wooed since then by states in a bid to finalize the multibillion-dollar settlement.

In recent weeks, Democratic lawmakers in Congress have also expressed frustration with the resistance of Fannie and Freddie’s independent regulator, the Federal Housing Finance Agency, to carry out principal write-downs. Republican attorneys general, meanwhile, have spoken out against principal write-down.

Ms. Harris on Thursday didn’t specifically address the settlement talks, which have not included Fannie and Freddie. Instead, she called on the agency’s acting director, Edward DeMarco, to “step aside” if he “is unwilling to support principal reduction for these home loans in crisis.”
Why won’t Fannie and Freddie write down loan balances? There are three broad reasons. First, the firms guarantee $5 trillion in mortgages, of which around 20% are underwater. But the vast majority of those underwater mortgages—around 87% for Freddie Mac—are current. The companies are reluctant to write down loan balances because of a concern that will create a moral hazard that induces other borrowers to default.

Second, Mr. DeMarco has said that the firms’ current efforts to modify mortgages are successfully reducing borrowers’ monthly payments to affordable levels without the costly step of forgiving debt. Fannie and Freddie are supported entirely by taxpayers and have run up a $145 billion tab so far, and the FHFA is charged with conserving the firms’ assets. In a recent interview, Mr. DeMarco said that principal forgiveness isn’t justified given that mandate.
Third, many underwater loans often are covered by mortgage insurance, which reimburses Fannie and Freddie for part of the loss when those loans default and go through foreclosure. The upshot is that even in cases where it might make economic sense for the loan to be written down, it still isn’t in the economic interest of Fannie or Freddie to write down certain loans.

Why aren’t Fannie and Freddie part of the foreclosure settlement? Just as Fannie and Freddie don’t actually make loans, they also don’t handle the day-to-day management of those loans, or what’s known as “mortgage servicing.” Instead, they rely on hundreds of companies, but primarily large banks, to service their loans. They publish detailed guidelines about what steps servicers must take, including timelines they must meet to foreclose on borrowers that haven’t qualified for a mortgage modification.
The current foreclosure settlement is focused on banks that didn’t properly service mortgages. While Fannie and Freddie, the two largest mortgage investors in the U.S., clearly failed to prevent the massive meltdown in mortgage servicing (and some have argued that they turned a blind eye to long-festering problems), the firms themselves don’t service mortgages. That’s one big reason they aren’t a party to the settlement.

What would the settlement do? Under the terms being discussed with banks, they would have to pay around $25 billion in penalties. Around $5 billion would be paid in cash. Another $3 billion would be spent by refinancing underwater borrowers whose loans are on the banks’ books. The remaining $17 billion would be spent on housing-relief efforts, primarily by writing down loan balances for underwater borrowers who are struggling to make their payments.

Would the settlement apply only to loans that banks own? That’s still up in the air. Initially, the Obama administration had pressed for the settlement to require banks to write down loan balances for borrowers whose loans they didn’t service. The logic behind that move was that investors, along with borrowers, had been harmed by servicers’ failure to properly handle distressed loans.

But banks have strongly resisted that approach because it would require them to essentially pay investors. Instead, the current settlement discussions have focused on allowing banks to pay their fines by writing down loan balances on mortgages that they hold on their books.

Around 20% of all mortgages in the U.S. are held on bank balance sheets.
The proposed settlement wouldn’t preclude banks from writing down loans that they service for other investors, according to people familiar with the matter, but banks appear unlikely to choose that option at this point.

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Lobbying Titans Square Off Over Loan Limits.

Influential housing and banking industry lobbying groups are clashing on Capitol Hill over whether to restore higher limits on the size of government-backed mortgage loans.

The lobbying battle pits real-estate agents against mortgage insurers — and even has banking groups on opposite sides. It comes as House and Senate negotiators prepare in the coming weeks to negotiators the details of a bill to fund several federal agencies through next September.

Senate lawmakers want the final spending bill to include a measure lifting the loan limits, which fell to $625,500 on Oct. 1 in expensive markets such as New York and San Francisco from $729,750. Under the Senate’s version of the bill, the higher limits would be restored until the end of 2013.

Powerful Republican lawmakers in the House favor keeping those limits at their current levels. Other Republicans, however, including several from California and New York, want to raise them.

The debate highlights a key question about whether the main goal of housing policy: Is the best to support the weak sector or at least do no harm to it? Or, should the top priority be reducing the federal government’s footprint in the $10.4 trillion U.S. mortgage market, given that the federal government stands behind more than nine in 10 new loans?

The loan limits vary by location, based on local home prices in a particular area. They have fallen to as low as $271,050 in some areas for loans backed by the Federal Housing Administration, which guarantees loans with down payments as low as 3.5%. Limits for loans backed by Fannie Mae and Freddie Mac can fall to as low as $417,000.

The National Association of Realtors has been the leading group marshalling forces to get the loan limits restored. Its allies include groups representing title agents, credit unions, home builders and mortgage bankers. The Realtors group is a big player on Capitol Hill, having spent $17.6 million on lobbying last year, according to the Center for Responsive Politics.
Ron Phipps, the trade group’s president and a Realtor from Warwick, R.I., said in an interview Friday that he is hearing from agents around the country who are concerned about the drop in loan limits.

The change, he said, has reduced the amount of money potential home buyers can borrow in nearly 660 counties in 42 states. That has forced home buyers to look for cheaper homes or drop out of the market entirely. The biggest impact on the housing market has been in the lower price ranges, rather than in cities with high housing costs, Mr. Phipps said.

The Realtors have won many battles on Capitol Hill and don’t expect this one to be different. “We look to prevail and we expect to prevail,” Mr. Phipps said. “We are working diligently to relay the message for American home buyers and home owners in a big way.”

Mortgage insurers, however, are pressing to maintain the current limits. Those companies allow borrowers to take out mortgages with down payments of less than 20%. Borrowers pay premiums and the mortgage insurers absorb some of the cost when borrowers default. The industry has lost market share to the FHA after the housing bust, and is struggling with losses from defaults and foreclosures. A large mortgage insurer, PMI Group Inc., was taken over by regulators last month.

The Mortgage Insurance Companies of America, which spent $4.1 million on lobbying last year, argues that restoring the higher loan limits would prevent private investment from returning to the U.S. housing market, a goal of both Democrats and Republicans.

Lifting the loan limits, the group argues, will push borrowers back into FHA-backed loans, with taxpayers holding 100% of the risk. And of course, doing so would hurt mortgage insurers’ ability to compete for business.
“This is a very small rollback,” in loan limits, said Teresa Bryce Bazemore, president of Radian Group Inc.’s mortgage-insurance business and president of the industry trade group. Even after the decline in loan limits, “given the fact that home prices have fallen, most borrowers would still qualify for an FHA loan,” she said.

Banking groups are divided on the loan-limit issue. While the Mortgage Bankers Association favors raising the loan limits, the American Bankers Association is opposed to such a move.
“Higher loan limits have done little to increase demand or prevent home prices from falling,” wrote Floyd Stoner, the American Bankers Association’s top lobbyist, in a letter to lawmakers this week. “Private capital must return to housing finance if we are ever going to reform the system and take the taxpayer off the hook for the guarantee of virtually every mortgage made.”

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Bernanke - Housing Rebound May Hinge on Access to Refinancing

Nov. 1 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke can't go it alone when it comes to reviving the U.S. housing market.

Fed policy makers, who start a two-day meeting today, are considering buying mortgage-backed securities to push down borrowing costs and help homeowners refinance their debt. That would reduce monthly payments, freeing up cash for other purchases that could spur the economy and reduce unemployment, Fed Governor Daniel Tarullo said Oct. 20.

Such an effort would save homeowners $60 billion to $80 billion a year, or about 0.5 percent of gross domestic product, so long as the Obama administration succeeds in helping homeowners through a stepped-up refinancing aid plan, said Joseph Gagnon, a former Fed economist. Should the program fail, Fed asset-buying would probably provide homeowners less than half its potential savings, said Gagnon, a senior fellow at the Peterson Institute for International Economics in Washington.

“The Achilles' heel of the Fed's efforts so far has been that the monetary-policy transmission has not worked as they would like because of, in large part, the inability of consumers to get loans” for homes and other purchases, said Ward McCarthy, chief financial economist at Jefferies & Co. in New York.

Refinancing Program

The Federal Housing Finance Agency said Oct. 24 it will let qualified homeowners refinance mortgages regardless of how much their houses have dropped in value, expanding terms of the 2009 Home Affordable Refinance Program, which has fallen 80 percent short of the goal of reaching 5 million borrowers. The FHFA estimates the changes will help generate about 900,000 refinanced loans by the end of 2013. If the alterations to the so-called HARP plan don't spur refinancing, any Fed purchases of mortgage bonds would bring limited benefits, said McCarthy, a former Fed researcher.

The Federal Open Market Committee, which has kept its benchmark interest rate near zero since December 2008, began a two-day meeting today and plans tomorrow to release a statement and economic projections from governors and regional Fed presidents. Bernanke is scheduled to hold a press conference at 2:15 p.m., his first since June and third since the Fed started the briefings in April.

Central bank officials may not be ready this week to pull the trigger on more bond-buying because of an increase this year in core inflation, which excludes food and fuel costs, Gagnon said. Once policy makers see slowing price gains for another month or two, “they will then feel empowered, indeed driven,” to restart asset purchases, he said.

‘Top of the List'

Tarullo, in a speech in New York last month, said additional mortgage-securities purchases should “move back up toward the top of the list of options” because “the aggregate -demand effect should be felt not just in new-home purchases, but also in the added purchasing power of existing homeowners who are able to refinance.” Fed Vice Chairman Janet Yellen said Oct. 21 that a third round of asset purchases “might become appropriate” if the economy's state warranted additional stimulus.

“I don't know how you could embark on a program of buying agency mortgages thinking you're going to stimulate more refinancing,” said Bryan Whalen, co-head of mortgage bonds at Los Angeles-based TCW Group Inc., which oversees $120 billion in assets. “It's not a rate issue, it's a qualification issue.”

Switch From Treasuries

The average rate on a typical 30-year fixed mortgage fell to a record low 3.94 percent in October, from this year's high of 5.05 percent, before climbing to 4.10 percent last week, according to Freddie Mac survey data. In September, the FOMC voted to reinvest proceeds from maturing housing debt into mortgage-backed securities, switching from Treasuries.

Treasuries rose as renewed concern Greece will default and the European rescue plan will unravel boosted demand for the safest assets.

The yield on the 10-year Treasury note fell 12 basis points to 1.9 percent at 11:09 a.m. in New York trading. New York Fed President William C. Dudley said Oct. 24 that removing “impediments” to the transmission of monetary stimulus would make the central bank's record easing more effective. The FHFA's plan to make it easier for borrowers with high loan-to-value ratios to refinance is “a step in the right direction,” he said, adding he hoped additional measures would follow.

Bernanke said in congressional testimony last month that the Fed needs help from other branches of government to aid the economy. “Monetary policy can be a powerful tool, but it is not a panacea for the problems currently faced by the U.S. economy,” he told the Joint Economic Committee Oct. 4.

Boosting Stocks

Gagnon urged the central bank to target a 30-year mortgage rate of 3 percent to 3.5 percent by buying as much as $2 trillion of mortgage-backed securities. While boosting stocks and supporting property prices, Fed asset purchases may help create at least 3 million jobs, he said in an Oct. 24 blog titled

“The Last Bullet.”

“The Fed could do stuff, and it would help, but there would be a lot of people who without HARP couldn't take advantage of it,” Gagnon said in a telephone interview.

Reduced home prices and tightened lending standards have slowed the pace of replacement home loans. The Mortgage Bankers Association forecast on Oct. 11 that refinancing this year would total $783 billion, down from $1.1 trillion last year, even amid lower interest rates. Refinancing peaked at a record $2.5 trillion in 2003.

Reduce Loan Rates

Stanford University Professor John Taylor, best known for the Taylor Rule formula that suggests how the Fed should set its benchmark interest rate, said more Fed purchases of mortgage bonds are unlikely to reduce loan rates.

Another round of purchases wouldn't cut rates “appreciably, and not really in any predictable way,” Taylor, an economic adviser to House Republican lawmakers, said in a phone interview.

Taylor and one of his graduate students, Johannes Stroebel, wrote a paper arguing that “it is difficult to detect a significant effect” from Fed purchases of mortgage bonds totaling $1.25 trillion from January 2009 to March 2010.

Gagnon, co-author of a Fed study that found the bond buying lowered borrowing costs and helped the economy, disputed Stroebel and Taylor's findings, saying they focused on the impact of the actual purchases, rather than the announcement.

Fewer ‘Distortions'

A May 2011 Bank of Canada review of research into central bank bond-buying said the Fed's MBS purchases “appear to have eased mortgage-market conditions.” At the same time, the Fed's $600 billion, second round of bond purchases, undertaken from November 2010 through June of this year, probably had a “more modest” effect because of fewer “distortions” in financial markets and the economy at the time, the Canadian central bank's researchers said.

Without the administration program sparking more refinancing, Fed asset purchases won't be of much help to the housing market, says Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut, who opposes further bond-buying.

“If the pipeline is stuck, then it doesn't matter if mortgage rates are 4 percent, 3.5 percent or zero,” said Stanley, a former Richmond Fed researcher.

--With assistance from Jody Shenn in New York. Editors: James Tyson, Christopher Wellisz

The views, opinions, positions or strategies expressed by the authors and those providing comments or external internet links are theirs alone, and do not necessarily reflect the views, opinions, positions or strategies of First Capital, we make no representations as to accuracy, completeness, current, suitability, or validity of this information and will not be liable for any errors, omissions, or delays in this information or any losses, injuries, or damages arising from its display or use. All registered trademarks, copyright, images, or other items used are property of their respective owner and are used for editorial purposes only.

Visit First Capital Online or call: 310-458-0010