Next Moves For Federal Housing Stimulus

Home-buyers have been enjoying rock-bottom mortgage interest rates. But several key factors threaten to disrupt the low rates, as well as the budding housing recovery.

It has the makings of a perfect storm: The Federal Reserve may stop propping up the marketplace at the end of March. The home buyer tax credit ends April 30 (you have until June 30 to complete any April deals). And, in the coming months, Fannie Mae and Freddie Mac could top out their mortgage portfolios and not be able to buy any more.You may not realize it, but the Fed has been the primary buyer in the marketplace in the past year, buying more than $1 trillion in mortgage securities. They've promised to end that support by March 30. Before the Fed stepped in, the best rate you could find for a 30-year fixed-rate mortgage in November 2008 was 6.04%.

While it's possible that China and Wall Street investors will jump back into the market if the Fed pulls out, I doubt we'll see anywhere near the level of support the Fed has given. Private investors are still very skittish about the U.S. mortgage markets as foreclosures continue to mount. Of course, the Fed could change it's mind and continue propping up the mortgage market, if necessary. There are still two more Fed meetings before the mortgage securities program ends on March 30.

Fannie Mae and Freddie Mac have bought most of the rest of the mortgages, but they're nearing their mortgage cap of $900 billion each, and the agencies each have just $150 billion or so more to spend. FHA has been another player helping people get mortgages, but they too are running into trouble and tightening up their mortgage rules.

There's one more key factor that could threaten a housing recovery, but ease the strain on interest rates. That's the tax credit home buyers currently are taking advantage of that is scheduled to end April 30. When the credit was initially expected to expire last October, pending homes sales dropped by 16% . Come May, fewer people could be out there making deals, which might help to ease pressure on mortgage interest rates, keeping them lower.

Now is not the time for the government to pull the plug on its efforts to prop up the market. There is no sign of a reinflating bubble -- house prices seem flat, or are still dropping in some communities. In the end, if the government wants to see a full recovery, it's going to have to keep the aid coming.

Lita Epstein has written more than 25 books including The 250 Questions You Everyone Should Ask About Buying Foreclosures.
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