The Breakdown | Explaining Southern California's economy

Wells Fargo reduction of loan limits is bad news for Southern California mortgage market


Southern California has two Very Large Economic Problems right now: higher unemployment than the national average (around 12 percent versus 9.2 percent); and a thoroughly cratered housing market, down a knee-buckling 44 percent since its peak in 2005. 

Now there’s something else. According to the California Association of Realtors, Wells Fargo will “[no longer] accept applications for loans using...temporary loan limits ($625,501-$729,750),” limits that were raised by Congress in 2008, but are scheduled to expire September 30. So $625,500 is now the new ceiling for a loan that can be backstopped by Fannie and Freddie.

Obviously, this is a challenge for the Southern Californian housing market. Let’s look at prices in L.A. County, which fell last month, but where the median is still $320,000. It’s not as expensive to buy here as it was during the boom. But it’s far from cheap, particularly in desirable areas. In fact, the whole reason for Congress to up the limit was to keep prices from completely tanking in high-cost regions, like SoCal.

Upper-middle-class buyers will now no longer be able to get conforming loans from Wells Fargo above the $625,000 limit. Look at a neighborhood like Silver Lake in L.A., where the median home price is now $540,000. Because we’re dealing with the median here, whatever very expensive homes sold in Silver Lake are excepted. But there’s still not a whole lot of room to maneuver between $540,000 and $625,000. 

What this means in practice is that Wells Fargo is reacting to an imminent liquidity withdrawal from the market by saying that it’s going to raise the cost of writing loans on higher risk. Now anything above $625,000 will be defined as a jumbo loan, requiring a higher down-payment and commanding a higher interest rate. The problem here is that doing a 30-year fixed-rate jumbo with Wells Fargo is going to cost the borrower 37 basis points in interest. 

Sure, rates are at historic lows, so that doesn’t sound like much. But you're going to need a 25 percent down payment, and if you finance, say, $650,000 at 4.625 percent over 30 years (that’s the rate the Wells Fargo is currently listing), you’ll pay about $553,000 in total interest. Do it at 4.25 percent and you’ll pay $33,000 less.

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