Financial Regulatory Forum

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.

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