What If the Goverment Cuts Its Lifeline for Housing?
But depending on market conditions, those purchases may not end in March. The FOMC emphasized that it would continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in the financial markets." If the Fed doesn't see private money coming back into the mortgage market, it will either need to change its mind or let mortgage rates rise back to the 6%-plus range they were before the Fed started its intervention.
Mortgage rates are currently below 5%. If they jump back up to 6%, lots of people won't be able to afford a home that may have been within reach at the lower interest rate.
This Could Be Just a Test
A few members of the FOMC pushed for "expanding the planned scale of the Committee's large-scale asset purchases and continuing them beyond the first quarter, especially if the outlook for economic growth were to weaken or if mortgage market functioning were to deteriorate." But one member suggested that the quantity of the planned asset purchases could be scaled back. The minutes do not indicate who that member was, but that individual also suggested that "it might become appropriate to begin reducing the Federal Reserve's holdings of longer-term assets if the recovery gains strength over time."
The Fed still meets twice more before the deadline and could decide to expand the purchase of mortgage-backed securities if the private investment market doesn't pick up the slack during 2010's first quarter. A move to stop purchasing mortgages securities could be a test. If it fails, the Fed will likely step back in.
Also, on Christmas Eve the Treasury department gave a huge gift to Fannie Mae and Freddie Mac, allowing both to retain portfolios of up to $900 billion. At the end of October, Fannie held $771.5 billion in mortgages, and Freddie held $761.8 billion. That means they still have about $300 billion to use for buying mortgage securities. That will help keep funds for the mortgage market flowing for a short time even if the Fed pulls out.
Another Tax Credit Extension?
Extending the tax credit for home purchases past April 30 could also help keep the housing industry afloat. After the first tax credit ended in October 2009, pending homes sales dropped 16% in November -- after rising for the previous nine months. That clearly showed how important the first-time homebuyer's tax credit had been for rejuvenating housing. Analysts had expected just a 2% drop for November. Now, existing home sales are also feeling that effect, falling by 16.7% in December.
Clearly, Congress got the message that the housing industry hadn't yet healed enough to go it alone. With foreclosures continuing to mount, there's no reason to think it will be ready on May 1. Considering the election that's looming this year, it's likely that Congress will decide to extend that tax credit as well.