The federal government is beginning to cut back on its support for the private sector. Is it too soon?
Over the past year, the government has intervened heavily at essentially every stage of the home-buying process and the housing market has become very dependent upon the government. In fact, more than 80% of the new residential mortgage loans made this year benefited from some form of government support, according to the trade publication Inside Mortgage Finance.
To keep funds flowing to the housing market, the government bailed out Fannie Mae and Freddie Mac last year and now basically owns the mortgage finance giants and their $5.4 trillion in loan portfolios.
And to boost sales, the government also is offering $8,000 tax credits to first-time home buyers.
The government’s efforts are the primary reason the housing market is functioning at all. Despite signs of improvement, the housing market is still a shell of what it was. U.S. home prices are only back to 2003 levels.
Freddie Mac & Fannie Mae backing means private lenders are assured of repayment by the government, if not the borrower. The size of loan that can be guaranteed is capped in most parts of the country at $417,000, but can reach as high as $729,750 in high-cost areas such as parts of California, New York and D.C. R
Relatively few “jumbo” loans are being made – those above Fannie and Freddie limits. Loans above those levels are hard to obtain, in part, because lenders are requiring up to 40% down on the large loans. That’s double what was considered standard before the boom.
Since the beginning of the year, the Fed has purchased $836 billion of mortgage backed securities issued by Fannie Mae, Freddie Mac and Ginnie Mae, the federal body that securitizes FHA loans. The purchases have helped push down interest rates on mortgages guaranteed by the firms from nearly 6.5% last October to 5.25% today.
The Fed is likely to decide to carry on buying until it reaches the $1.25 trillion target it set in March, and then taper off gradually. Some Fed officials want to stop sooner.
The first-time home buyer’s tax credit, which provides up to $8,000 for individuals earning up to $75,000 and couples earning up to $150,000, is set to expire in November. Congress will have to decide whether to extend it. Deutsche Bank estimates the credit has helped generate 350,000 sales, about half the increase in single-family home sales in the past six months.
Analysts think that many of the home sales spurred by the tax credit have been stolen from the future, luring buyers into the market who might not otherwise have bought until next year or beyond. When the credit expires, that demand will disappear, too.
The FHA, which insures private lenders against defaults on home mortgages, has its own tough issues having seen its balance sheet take a hit as risky borrowers default on loans. Already the FHA is in danger of falling below a level of reserves mandated by Congress.
For many mortgage companies, loan volume is up but profitability is down. Why? Partly because of costs of working with the government. For example, to work with the FHA a firm must provide audited annual financial statements, an expense that runs about $10,000 annually, plus have a certain percentage of loans audited each quarter.
The housing market is extremely dependent right now on what the government decides. Both are in shaky positions. I see no signs of strength in either area. What do you think?
Read more at the Wall Street Journal.com