Less Government, More FHA Loans?

by Peter G. Miller
February 1st, 2010

The Washington Post reports that “whether the housing market is ready or not, the government is pulling out.”

According to the paper, “the wind-down of federal support for mortgage rates, set to end in two months, is a momentous test of whether the Obama administration and the Federal Reserve have succeeded in jump-starting the housing market and ensuring it can hold its own. The stakes for the economy are massive: If the market again falls into a tailspin, homeowners could face another wave of trouble, and it would deal a body blow to President Obama’s efforts to get the economy on track.” (See: Stakes are high as government plans exit from mortgage markets, January 25th)

I’ve been wondering about this since the article appeared last week and my general conclusion is: You’re kidding.

For those who may not have noticed, there’s a mid-term election this year. Politicians will not want to do anything that will endanger their chances of re-election. Thus you can expect the first-time homebuyer tax credit, which is scheduled to end with contracts written in April, to be continued.

Interest Rates

“Over the past year,” says the article, “these programs have enabled prospective home buyers to get cheap loans, helping those buying and selling property as well as those eager to refinance existing mortgages. If the end of the initiative drives up interest rates, say from 5 percent to 5.5 percent, homeowners could be deterred from refinancing, industry officials say. A sharper increase in rates could make homes too expensive for many buyers, forcing them from the market and causing the recent pickup in home sales to stall.”

Oh my, 5.5 percent! This is a joke, right? Of course this is what “industry officials” would say.

Look at the history of mortgage rates during the past four decades and what do you see? As Freddie Mac reported a few weeks ago in December when rates for 30-year fixed rate loans reached 4.71 percent with 0.7 points, “the 30-year has never been this low since Freddie Mac began its weekly survey in 1971.”

FHA Mortgages

The more likely scenario is that the government will continue to support mortgages and housing, especially the FHA mortgage program. Why?

First, the FHA keeps gaining market share, in large measure because so many lenders have failed during the past three years.

Second, while the FHA has significant losses they are minimal when compared with the subprime losses from the private sector.

Third, the FHA has a sane and sensible system to help distressed borrowers which results in an unusually-high “cure rate” — an expression which means most FHA loans get back on track and do not wind up in foreclosure.

Fourth, the FHA will plainly tighten underwriting standards even beyond the steps it has taken during the past 18 months, making it even more conservative and secure.

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