Don't Burn the Bridge Until We CrossOctober 22, 2012 Posted by: Joe Morgan
I'm holding on with both hands and both feet, oh
Promise that you won't pull the rug out from under me
Are you a heartbreaker?
As part of the Fed's FOMC announcement due tomorrow, it isexpected to announce the winding down their MBS purchase program,whereby the government has been buying mortgage paper in themarketplace. One can see how this has supported the mortgage marketby helping to keep interest rates low. While I applaud the Fed'sefforts to begin reining in certain stimulus well before we see the"whites of the eyes" of inflation, breaking the hearts ofhomeowners does not seem the correct course of action today.
With the president set to propose significant and lasting changesto the Fannie/Freddie model early next year, now is not the time tobe pulling back on housing stimulus programs. All things beingequal, however, we may be at the beginning of new housing troublesas the private sector is not yet ready to pick up the slack forthese programs - not until uncertainty around the twins is greatlydiminished.
Today, some 85 percent of new home mortgages are touched by thegovernment in some way - primarily they are insured by Fannie orFreddie. But the twins are facing mandated reductions in portfoliosize later this year which begs the question: who will lend to themarginal homebuyer?
Private lenders have shied away from this market for rational andirrational reasons alike. But no matter the reason, they simplyaren't there. Looking at housing statistics, it seems we may be ata plateau of sorts in terms of homes for sale and prices. This isvery good news compared to the last 24 months or so, although thehousing market remains quite fragile.
So, why are the private lenders continuing to shy away, if it seemswe've hit bottom? I argue it's because of the tremendousuncertainty about where the twins will play in this market goingforward. In addition to the 85 percent of new mortgages theyaffect, they are responsible for some 55 percent of total mortgagesoutstanding - a number that is obviously increasing. To put itlightly, they are the 800-pound gorilla in the mortgage market.Read More