Government’s role in Housing, How far will it go?
This year Government has announced a ton of programs to prop up the Housing Market. Some of the major programs have been geared towards Foreclosure Prevention by launching 125% refinance program and incentivising Loan Servicers for modifying loans for struggling home owners. The Higher Conforming Loan Limits up to $729,750 would also be extended through 2010. Of course, all this has come with increased regulation. My focus on this blog is to talk about 3 actions that has had the most impact:
Action #1 Buying Mortgage Backed Securities (MBS)
The Government earlier this year decided to buy $1.25 trillion of Mortgage Backed Securities by Dec 31, 2009. On top of that Fed also planned to buy up to $200 billion in debt issued by Fannie Mae and Freddie Mac. Last month, the Fed decided to slow the process and extend it to March 31, 2010. Note that they haven’t increased the volume that they plan to buy.
Current Status: The Fed is more than two-thirds done into buying these securities. Because of heavy government intervention in the mortgage market, interest rates remain near their lowest levels in decades. Housing affordability index measured by National association of Realtors is at its highest point since 1970 in most of the areas.
Outlook: How much mortgage yields rise when the central bank ends its purchases will depend in part on how the Fed communicates its plans and how private investors respond.
If the Federal Reserve Board suddenly stops purchasing agency mortgage-backed securities, rates could jump by 30 basis points to 50 bps, according to Fannie Mae chief economist Doug Duncan. I wouldn’t be surprised if Government continues buying MBS through 2010 albeit at a much slower pace.
Action #2 First Time Home Buyer Credit
Government earlier this year announced tax credit up to $8000 for first time home buyers. This credit in it’s current avatar is set to expire in Nov 30, 2009.
Current Status: In Sept 2009, First Time Home Buyers accounted for more than 45% of closed escrows. Besides the low property prices and low mortgage rates, the tax credit has played a big part in this. In fact, A C.A.R. survey of first-time home buyers shows that 40 percent would not have purchased a home without the tax credit.
Outlook: The credit is all set to be extended. It may even be expanded. It was reported that Senators have agreed to a $8000 tax credit for First Time Home Buyers and $6500 credit for repeat buyers if the purchase contract is signed by April 30, 2010. The bill still has to pass the Senate and the House.
Action #3 Increased role for FHA and other GSEs
With the fall of subprime mortgages and disappearance of private investors FHA grew rapidly in 2009. HUD now insures more than one third of mortgage originated in the country.
Current Status: Treasury-backed entities are guaranteeing in one form or the other about 85% of new mortgages. While big banks are originating lots of mortgages, they are selling nearly all of them to Fannie Mae and Freddie Mac. Indeed, combined single-family mortgages held on the balance sheets at J.P. Morgan, BofA and Wells actually fell 3.5% in the first half.
Outlook: FHA will continue to grow. With the market being dominated by First Time Buyers and FHA still offering 3,5% down payment, some estimates project FHA volume to grow to $1 trillion in 2010. If that happens FHA will become a bigger player than Fannie & Freddie combined.
In closing –
Even though technically the country is now out of recession, the recovery is going to be wobbly. Government is aware of that and also understands that Housing will play a key part in the recovery. So I don’t see a complete removal of support system anytime soon.
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