- The Washington Times - Monday, August 31, 2009

Home sales are showing faint signs of life only after massive federal rescue efforts, raising questions about whether the government will ever be able to withdraw its support without prompting another collapse in the housing market.

Some analysts say the government may be permanently in the mortgage business after taking control of Fannie Mae and Freddie Mac a year ago and purchasing nearly half of their mortgage-backed securities in an effort to spur a revival in home sales by keeping the interest rates on 30-year mortgages near record lows. The result of these efforts is that the government now owns or guarantees a majority of mortgages in the United States.

“The mortgage market in the United States is now nationalized, with 85 percent of new loans being supported by the government,” either directly through insurance programs or indirectly through its backing of Fannie and Freddie, as well as banks and money market funds that are government-insured and also have large mortgage holdings, said Edward Pinto, a former chief credit officer at Fannie Mae.

“The modest upturn is the result of over $1 trillion in housing stimulus in the last 10 months,” he said.

Beyond the low mortgage rates that the government is engineering through its unprecedented intervention, many analysts are attributing the modest uptick in home sales this summer to increasing foreclosure sales and the $8,000 tax credit that the economic stimulus package provides for first-time homebuyers through Nov. 30.

The real estate industry and many economists are saying that Congress will have to extend the tax credit to keep the housing market from falling back into the crushing recession of the past three years.

“The bump may be temporary,” said Robert Cyran, an analyst with Breakingviews.com, a British economic think tank. “The government credit for first-time homebuyers has goosed demand - with cheap homes benefiting the most,” he said. “If it isn’t extended, demand for homes is likely to suffer.”

“This was a vital component in turning the housing market around,” said Steve Murray of Real Trends, an industry group, noting that July home sales increased year over year for the first time since 2005.

“Much of the optimism [about a recovery in housing] is based on the continuation of current government efforts to stimulate housing,” he said. “One trusts that those in Washington understand the implications.”

Because of income restrictions and other limits, the temporary tax credit mostly has benefited buyers of low-priced homes. The industry is calling on Congress to extend, increase and expand the credit to all homebuyers to help ensure a continued recovery.

Housing economists say Congress also will need to extend and expand the increased limits on loans insured by the Federal Housing Administration and backed by Fannie and Freddie, because higher-priced homes remain difficult to sell.

The increased $729,750 limit this year on FHA-insured loans has exposed the government to much greater costs on defaults on the loans, which often have low down payments. Because the FHA’s loan terms are now more lenient than those of private lenders, it has captured more than a third of the home-purchase market this year, further increasing the government’s exposure to losses.

The government’s greatly enlarged role in the mortgage market was prompted by the breakdown and collapse of the “nongovernment” mortgage market a year ago. The interest rates on loans from private lenders, such as jumbo mortgages of more than $729,750, have soared by nearly a full percentage point above government rates - stifling interest in higher-priced homes. In states such as California, where housing costs are high, the scarcity of jumbo financing has caused prices to collapse, particularly for high-end homes.

The Democratic Leadership Council and other political groups are advocating an expansion of the tax credit. Congress will have plenty of incentive to extend the housing subsidies in any case, Mr. Murray said, because most analysts think the overall economy cannot have a lasting recovery without a sustained revival in the housing market.

The sharp rise in jumbo mortgage rates was one symptom of the new reality: With nearly one in 10 homeowners now delinquent on their loans, private banks and investors expect mortgage default rates in the United States to remain elevated and are demanding higher compensation to purchase mortgage loans that do not have the guarantee of government backing.

It was the sharp rise in private mortgage rates - which threatened to spill over even to mortgages backed by Fannie and Freddie - that prompted the Federal Reserve and Treasury late last year to launch a massive program to purchase mortgages that are pooled and securitized by Fannie and Freddie. The rate on 30-year mortgages fell below 5 percent, a record low, shortly after the Fed’s announcement in January. It has ticked up since then but remained in the 5 percent range.

Economists question whether interest rates on mortgages would have been low enough to nurture a stabilization and revival in housing sales without the government investments. The central bank is on schedule to purchase $1.25 trillion in Fannie and Freddie mortgage bonds by the end of year and has provided the funding for virtually all new mortgages this year. The Treasury has purchased an additional $171 billion of mortgage securities this year.

Mr. Pinto said foreign and domestic investors dumped $580 billion, or a quarter of their Fannie and Freddie holdings, in the year that ended in March, forcing the government to act to prevent a sharp rise in interest rates. As a result, the government’s exposure to risks in the housing and mortgage market has never been so great, he said.

Although the Fed hopes to sell off its extensive mortgage holdings eventually, it plans to keep adding to its portfolio through the end of the year. Mr. Pinto said it may be difficult for the Fed to exit once it owns nearly half the market, and it risks incurring huge losses on the mortgages if interest rates are rising when it sells.

The Congressional Budget Office and other analysts already deem Fannie and Freddie to be federally owned and have included them on the government’s balance sheets. Congress and the administration have directed the two enterprises to spearhead efforts that are high on their social and political agendas: modifying delinquent mortgages so people don’t lose their homes and refinancing mortgages on homes that are “under water” and in danger of going into foreclosure.

“I do expect them to remain under firm federal control,” Mr. Pinto said. “My experience is that once the federal government gets control of something, it almost never gives it up.”

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