BREAKINGVIEWS-US forges risky new weapon for mortgage battle
– The author is a Reuters Breakingviews columnist. The opinions expressed are his own –
By Rolfe Winkler
NEW YORK, Dec 29 (Reuters Breakingviews) – Uncle Sam is adding a risky new weapon in its battle to shore up the housing market. Granted, the latest Standard & Poor’s/Case-Shiller figures showed a fifth month of improvement. But analysts had already discounted that, expecting prices to fall 10 percent or more next year as various government supports are wound down.
The Treasury’s Christmas gift of almost unlimited support for Fannie Mae and Freddie Mac might be able to fend some of that off. But it will be a tough fight. A housing tax credit — of up to $8,000 for first-time buyers — ends in April. Meanwhile, the Federal Housing Administration plans to tighten its loose lending standards as its reserve fund has dwindled.
Moreover, mortgage rates can reasonably be expected to increase as the government ends purchases of mortgage-backed securities. Treasury’s $220 billion buyback program ends this week. The Federal Reserve’s $1.25 trillion program ceases in March.
And then there’s the continuing flood of Treasuries to finance the federal deficit. Morgan Stanley estimates that could drive 30-year mortgage rates back above 7.5 percent, an effective 40 percent increase in the cost of financing home purchases. Even a smaller jump risks driving buyers from the market, which could force house prices down.
Then there are foreclosures. Credit Suisse expects 4.2 million next year and estimates that 3.2 million must be prevented to keep prices stable. That’s a tall order, considering mixed results from modification efforts that mostly focused on extending terms or lowering interest payments.
Banks, mortgage bond investors and servicers are loath to go further, by forgiving principal, because it’s either a direct hit to capital or tricky to do under current bond documents.
Enter Fannie and Freddie. With unlimited support from Treasury the two have theoretically unlimited capacity to eat losses, useful to Treasury if it wants to finance an expanded modification program that includes principal forgiveness.
It’s a tempting weapon to deploy ahead of midterm elections. But financing principal writedowns with taxpayer money only adds to America’s debt burden while rewarding irresponsible borrowers and lenders.
– The latest reading from S&P/Case-Shiller showed that the 20-city index of U.S. house prices declined 7.3 percent in October versus the same month the prior year. Seasonally adjusted, the data showed a 0.4 percent increase in October compared to September.
– On Dec. 24, the U.S. Treasury expanded its support for Fannie Mae and Freddie Mac, announcing that over the next three years there will be no limit to Treasury’s funding commitment to the two companies. Previously, Treasury had promised up to $200 billion each. Thus far Fannie has drawn $60 billion and Freddie has drawn $51 billion.
– Treasury also altered a rule that would have required the two companies to shrink their portfolio of retained mortgages by 10 percent. The new rule limits the growth of their portfolios to 10 percent below the statutory maximum of $900 billion. The change increases the companies’ combined capacity to hold mortgages by approximately $240 billion.
Treasury press release