Feds steady housing market, perhaps permanently

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By Patrice Hill

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.