Cut in Government Aid Could Deal Blow to Housing Market

(Feb. 23) -- Housing, a cornerstone of the nation's economy, is about to lose several layers of federal aid that went a long way toward preventing the sector from crumbling and the economy from sinking deeper into recession.

Over much of the past two years, during the greatest economic downturn since the Great Depression, government programs rendered housing more affordable through lower mortgage interest rates, home-buying incentives and a greater supply of federally insured loans. That assistance is beginning to fade, leaving behind the potential for more expensive housing in an economy that has not yet fully recovered.

The government is questioning its own plans to withdraw from the nation's housing market. During the December meeting of the Federal Reserve's Open Market Committee and Board of Directors, members voiced concern about the economy's ability to sustain growth without a strong housing sector.

"In particular, they noted the risk that improvements in the housing sector might be undercut next year as the Federal Reserve's purchases of MBS [mortgage-backed securities] wind down, the home buyer tax credits expire and foreclosures and distress sales continue," according to minutes of the meeting.

Mortgage-backed securities

Nevertheless, Federal Reserve Board Chairman Ben Bernanke recently restated the Fed's intention to end MBS purchases by the end of March. The program to buy $1.25 trillion in the securities helped boost their value for investors, and the investment kept mortgage rates affordable when home buyers and refinancing homeowners needed it most.

On Dec. 3, 2009, Freddie Mac said the average 4.71 percent fixed rate on 30-year conforming mortgages was the lowest it has been since Freddie began tracking the rates weekly in 1971. The same rate averaged 4.93 percent as recently as Feb. 18.

Within months after the mortgage securities subsidy ends, rates could easily rise a full percentage point -- if not more -- to near 6 percent, just about where they were before the Feds stepped in. That would add about $200 a month to the cost of a $300,000 mortgage, pricing many buyers out of the market and blocking refinancing for others.

The Fed concedes it may have to stay its hand if mortgage rates spike or the economy balks after the rug is pulled out from under mortgage securities.

"Obviously, if mortgage rates were to [go] back up a lot and if that had a big consequence for the economy, then we very well could rethink the issue about whether we wanted to buy more mortgages," Federal Reserve Bank of New York President William C. Dudley told The Associated Press.

Peter Miller, an independent, Silver Spring, Md.-based real estate expert known as "Our Broker," said election-year politics could also come into play.

"My expectation is that individual policies matter a lot less than the whole range of policies which have been undertaken. If the government in an election year sees a tumble in home prices, you can bet there will be emergency programs to prop up values," said Miller, author of "The Common Sense Mortgage."

Home buyer tax credit

That same hope for salvation extends to the tax credit of $8,000 for first-time home buyers and $6,500 for existing home owners.

It dies in a few months.

Before President Barack Obama signed the new tax credit deal on Nov. 6, 2009, more than 1.2 million taxpayer returns had claimed about $8.5 billion with the refundable tax credit, according to the Treasury Inspector General for Tax Administration.

With the expanded tax credit including move-up buyers, more consumers could take the deal, says Sherry Chris, president and CEO of Better Homes and Gardens Real Estate. "The move-up buyer is an important, and growing, demographic, and its activity in the industry is pivotal," said Chris.

However, unless the credit is extended again, a home buyer must have a sale agreement in hand by April 30 and close escrow by June 30. Military personnel, deployed overseas for a minimum of 90 days in 2008 or 2009, would have an extra year to claim the credit.

Time is running out for both housing consumers and the housing market.

When the earlier version of the tax credit was about to expire, so many potential buyers found themselves priced out of the market that resale home sales plunged nearly 17 percent, the greatest month-to-month drop in more than 40 years, according to the National Association of Realtors.

"It's significant that home sales remain above year-ago levels, but the market is going through a period of swings driven by the tax credit," said Lawrence Yun, chief economist at the NAR.

FHA loans

Chris said trouble also lies ahead for housing consumers who need low down payment assistance from Federal Housing Administration loans.

Once only a small fraction of all home loans, FHA mortgages soared to represent as many as 30 to 50 percent of mortgages in some locations. That's because the federally insured mortgages partially filled the gaping void left by the devastated subprime market.

Unfortunately, the agency, drained of cash reserves by mounting foreclosures, recently tightened loan requirements for borrowers, increased the cost of some FHA loans and made it tougher for lenders to participate.

"With the FHA making significant changes in early 2010, including tighter loan requirements, the real estate industry is sure to be impacted," Chris said.