| Government Intervention in Housing Market May End | | | | Disappear?"]. |
| Soon | | | | The Federal Reserve Bank has also played an |
| Based on all measures, the government's role in the | | | | important role in keeping the market for |
| housing/mortgage markets has expanded rapidly since | | | | mortgage-backed securities functioning smoothly. The |
| the onset of the credit crisis in 2008. Visit Here Now | | | | Fed has purchased at least $800 Billion in such |
| “In fact, more than 80% of the new residential | | | | securities as part of its quantitative easing mission, with |
| mortgage loans made this year benefited from some | | | | total purchases to reach as much as $1.45 Trillion next |
| form of government support, according to the trade | | | | March, when the program is slated to come to an end. |
| publication Inside Mortgage Finance.” Experts | | | | Again, it's impossible to understate the impact on |
| reckon that if the government were to exit, the | | | | mortgage rates. Since intervention began, the spread |
| nascent recovery would collapse immediately. | | | | between mortgage rates and Treasury rates has |
| Unfortunately, due to budgetary problems, this is | | | | narrowed by .7%, implying that rates would not be |
| becoming increasingly likely. | | | | toying with record lows if not for the hand of the Fed. |
| | | | | As the Fed slows down and eventually stops its |
| Let's begin by examining the government | | | | purchases, mortgage rates are expected to rise |
| “intervention” in greater detail. First, there is the | | | | dramatically. [Chart courtesy of WSJ]. |
| government tax credit, which provides up to $8,000 | | | | |
| towards the purchase of a new home, by first-time | | | | Last but not least, there is the Federal Housing |
| homebuyers. Originally designed as a tax credit, the | | | | Administration (FHA), which has become the major |
| cash can now be “monetized” and put towards | | | | player in the mortgage market. While the housing |
| a down-payment. It is impossible to understate the | | | | bubble was inflating, less than 10% of all loans were |
| success of this program: “Deutsche Bank | | | | backed by the FHA. Nowadays, that figure is closer to |
| estimates the credit has helped generate 350,000 | | | | 40%, and for some lenders, as high as 90%. When |
| sales, about half the increase in single-family home | | | | you consider that the FHA recently raised its limits, it's |
| sales in the past six months.” | | | | fair to say that obtaining a mortgage would be much |
| Unfortunately, many analysts are skeptical that these | | | | more difficult otherwise. |
| sales were facilitated by the tax credit. Rather, the | | | | The FHA has also been among extremely aggressive |
| assumption is that buyers who would have entered | | | | in executing loan modifications, in contrast to private |
| the market in the next couple years anyway, simply | | | | lenders, which continue to drag their feet. Under the |
| moved their plans forward to take advantage of both | | | | terms of the FHA program, borrowers are only |
| the credit and weak prices. It stands to reason, then, | | | | required to pay interest on 2/3 of the outstanding |
| that if the program expires in November (as | | | | principal balance. The remaining portion of debt is not |
| scheduled), that demand could plummet, and home | | | | forgiven, but must be repaid only in the event of a sale |
| prices could once again sink. | | | | or refinancing. |
| Then, there is the government takeover of Fannie | | | | Regardless of whether this saves the organization |
| Mae and Freddie Mac. Both companies are basically | | | | money – as it alleges – it still results in a net loss |
| insolvent, and if not for the injection of $200 Billion | | | | on every mortgage that it insures. Given also that a |
| funded with taxpayer money, it's safe to say that the | | | | higher proportion of FHA loans are delinquent (when |
| market for mortgage securities wouldn't be functioning. | | | | compared to uninsured loans), it's inevitable that its role |
| At some point, the government will have to come up | | | | in the housing/mortgage market will soon decline. Its |
| with a viable long-term alternative to the current | | | | reserves have already fallen to the lowest level in 75 |
| situation, the implications of which are still unknown. | | | | years, and the government has announced that drastic |
| [See related post: "Could Fannie and Freddie | | | | measures will be required if a bailout is to be averted. |