There is no doubt that the housing industry would have led us into a depression had the government not intervened with strong action during the past 12 months. Many are complaining that the government spent too much money and we will be paying for generations to come. However, not many in the mortgage industry are complaining about the programs that specifically help the housing and mortgage markets. Just as I am sure that not many in the auto industry complained about the Cash for Clunkers Program.
With the year coming to a close, we are again focusing upon governmental action. With a pipeline of millions of foreclosures on the horizon, there is little doubt that the housing markets could stand on their own without continued government support. To that end, the previous month held much good news in this regard:
The Fed released their statement after meeting for two days which indicated that conditions are “likely to warrant exceptionally low levels of the federal funds rate for an extended period.”
Translation: Short-term rates are not going up anytime soon. Low rates are critical to the housing recovery and, of course, the housing recovery is critical to the recovery of our overall economy.
And that was not the end of the good news as Congress passed not only an extension, but an expansion of the tax credit. The move to expand the credit to move-up buyers is critical because this market has languished as the first-time homebuyer markets have flourished since the beginning of this year. From CNN/Money:
The legislation also would extend the $8,000 homebuyer tax credit to contracts signed by April 30 and closed by June 30. The credit was set to expire after Nov. 30. The legislation also created a $6,500 credit for those who buy a home after owning one for the last five years. That measure would apply to contracts signed by April 30 and closed by June 30. The bill would raise the adjusted gross income cap to $125,000 for single filers and $225,000 for joint filers.
Congress also passed an extension of the Economic Stimulus Act’s loan limits for high-cost areas. This means the “$729K” limits will stand for another year. This action also is critical because while the government has propped up the conforming and government markets with heavy loan purchases, the jumbo markets continue to suffer. In order for the housing market to recover, we need all segments of the market to be firing on all cylinders.
Does this mean that the challenge is over? Unfortunately, no. Not only are we dealing with a huge pipeline of foreclosures, the Fed is still on schedule to exit the purchases of mortgage-backed securities (MBS) at the end of the first quarter of next year. Those who understand the markets know that the Fed’s control of short-term rates does not extend to long-term home loan rates. Many are predicting a poor reaction to the Fed's strategy. Here is what HousingWire had to say on this issue:
Celebrated bank analyst Meredith Whitney put out an industry note that zeroes in on the Fed’s MBS purchase program. She calls the “Great Exit” the biggest market and bank risk over the next four months. Let’s hope it emerges into the public view over the next four months, because it could be, if the Fed exits as planned at the end of first quarter 2010, the biggest kick in the stomach housing and financial markets have gotten since surviving the near total shut down of credit last fall.
We checked with our resident secondary expert, Eric Holloman, founder of RateLink. Eric indicated that he shares these fears. “The Fed must eventually exit from this market and how this plan plays out could very well significantly affect rates and thus our production next year.” If you would like a recording of a Webinar in which Eric gives a secondary update, e-mail us at
[email protected].
We are walking a tightrope right now. The reason the mortgage markets cannot exist on their own is the fact that mortgages are not seen as a safe investment. Until the default rates move down to acceptable and tolerable levels, the markets cannot stand on their own and government aid is critical. If the government leaves before the markets are healthy, then we are talking about a huge risk. The tax credit will not help if rates move up significantly, while lenders are still underwriting to find gold in every file.
What does this mean for you? Rates are low now. The tax credit is expanded. Foreclosures will keep a lid on price increases. We suggest you market these conditions heavily to your sphere. This may be the last chance for many in America to obtain bargain real estate prices with super low rates and a government kickback. There are not many times in our history when the conditions will be so ideal for millions to purchase. You may want to consider marketing right through the holiday season … and hope that the Fed makes the right decision so that the momentum continues through the New Year!
Dave Hershman is a leading author for the mortgage industry with eight books and several hundred articles to his credit. He is also head of OriginationPro Mortgage School and a top industry speaker. If you would like to stay ahead of what is happening in the markets, visit ratelink.originationpro.com for a free trial.
