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What Happens when Uncle Sam stops buying mortgages???

By Maureen Megowan

Real Estate Agent with Remax Estate Properties - BRE #01368971

September 20, 2009 07:36 AM

Currently, 85% of new mortgages are guaranteed by Government backed entities( FHA, FNMA, GNMA, Freddie Mac) and the Fed buys 80% of the securities into which these government backed mortgages are packaged. This dominance of the Fed and the reliance upon the Government to fund mortgages can not last forever. The Federal Reserve's $1.25 trillion special program to buy Fannie Mae and Freddie Mac securities is two-thirds complete and is scheduled to close at the end of the year. What happens then???

More than half of the country's home mortgages are now being originated by only 3 banks; Wells Fargo, Banik of America, and J.P. Morgan Chase. The problem is that these banks are acting only as originators of mortgages, and immediately sell most of the mortgages that they create to Fannie Mae and Freddie Mac and hold very few of them on their own balance sheets. Combined, the 3 dominant banks actually held 3.5 % fewer mortgages on their balance sheets in the firs half of 2009. (note: the statistics for this post came from a wall street journal article U.S. Bets the House - WSJ.com )

This strategy of the banks to sell almost all of their mortgages has fed their bottom line with strong loan origination and mortgage servicing fees with very little risk. The fact that banks are unwilling to hold mortgages for their own investment demonstrates that the interest rates of these mortgages are artificially low , driven down by the government purchase of them, and the banks are thus unwilling to invest their own money in them.

When the government stops funding mortgages, where will the capital come from? In the recent past, capital for mortgages came from mortgage backed securities funded by investors through Wall Street. This type of security is now dead. Investment by private capital ( banks, individual investors, and pension funds ) will only happen if interest rates are allowed to increase to a level to compensate investors for the perceived risk in these investments.

Because of this, I believe that there is a very real risk of interest rates escalating substantially after the first of the year, especially if signs of inflation start to emerge as the economy strengthens. Because of this, I have been encouraging buyers to buy now, if they are buying a home for the long term, as this may be the best time in the foreseeable future to buy a home.

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Gene Riemenschneider

Home Point Real Estate - Brentwood, CA

Turning Houses into Homes

I suspect you are right. There are too many variables to predict where we are going. I suspect inflation will dirve interest rates up and keep prices level, but I do not think we will have a big decrease in prices again.

Oct 10, 2009 12:44 PM

Barbara Tretola

RAC Real Estate Associates, Inc. - Massapequa Park, NY

That is why I joined the Steve Harney group so I can be prepared for when that time does come and it will. At a certain piint they will quit buying them and rates will go up, that is why it is best to keep informed so we can iform our sellers and buyers. If we keep a step ahead we will prepared for what will follow. He keeps us current on all the local and federal changes and possibilities.

Oct 10, 2009 01:50 PM

Jim McCormack

Nashville Short Sale Specialist - Jim McCormack - Edge Advantage Realty, LLC - 615-796-6898 - Murfreesboro, TN

Nashville Short Sale REALTOR - Stop Foreclosure

The question posed by this post was what happens when the government stops buying up mortgages? I think the real question is what happens when the government stops aritficially propping up the real estate market (i.e. through buying up mortgages, expanded FHA role, tax credits, bank bailouts, etc.)? The answer is that home prices will finally drop down to where they should be, which is based on peoples' incomes, not the availiability of debt. We have definitely not hit the bottom. More foreclosures are coming. Lower prices are coming. Higher interest rates are coming. Personally, I would much rather pay a low price with a high rate versus an inflated price with an aritifically low rate. Why? Exit strategy. Prices and interest rates are inversely related. Prices and availability of debt are directly related. Therefore, a market with cheap and readily available mortagages is by definitiion over priced. That is why now is decidely not the time to buy unless you are buying a foreclosure or short sale at a steep discount. It is always best to buy when prices are cheap (i.e. when rates are high and mortgages are harder to obtain) and then sell when rates are low and mortgages are easier to obtain. If you buy when rates are cheap and loans easy to obtain what happens when you need to sell in a market where rates are high and loans harder to obtain - a short sale.

What we need to remember is the "investment" aspect of owning a home was never that the home would increase in value at 20% to 30% per year and you be able to resell it and make a mint in a few years. That whole thing was an aberration. The real "investment" aspect of owing a home was the annual protection from inflation and the buildup of equity so that after 15 years or so you would actually own your own home and not be paying rent. Somehow, we have lost our way the era of the perpetual mortgage payment settled in. My view is that you always have a mortgage payment then you do not really own the home. Instead of paying rent to Mr. and Mrs. Smith, you are paying "rent" to the bank (or now Uncle Sam).

Oct 10, 2009 03:40 PM

Jirius Isaac

Isaac Real Estate &TriStar Mortgage - Kenmore, WA

Real Estate & loans in Kenmore, WA

this is all to complex and none of us really knows the answers. However, I agree that it is apparent that interest rates will go up, which will cause prices to drop even more. This is going to last a long time.

Oct 10, 2009 04:19 PM

Charles Perkins

Charles G. Perkins, CPA - Burien, WA

Interest rates are bound to go up. Just like taxes. The government continues to create more debt with little concern for the consequences.

Oct 10, 2009 05:45 PM

J. Philip Faranda

Howard Hanna Rand Realty - Yorktown Heights, NY

Associate Broker / Office Manager

The government will never stop buying mortgages.

Oct 10, 2009 08:00 PM

Anonymous

David Wallner

Way to say it Maureen. Soon we will hear about a Mortgage Czar (if there isn't already one) being appointed to make sure you cannot actually do an early payoff a debt that is owned by the government, even though the papers you signed said otherwise. If you actually had the money to get out from underneath the governments control it would be deemed to be a diversity issue because the demographic wouldn't meet the new standards. After all, we cannot have a bunch of evil rich people doing something that would be unjust to the rest of the lazy masses. Can you tell where I'm coming from on this?

Oct 10, 2009 08:35 PM

#79

Debbie Summers

Charles Rutenberg Realty - New Smyrna Beach, FL

Marueen -

You raise a very serious question that "the media" is talking about... Our fragile housing market certainly doesn't need additional complications.

This is a well deserved feature, with some OUTSTANDING COMMENTS.

Oct 10, 2009 11:44 PM

Anonymous

William Lasko

The ONLY game in town is not through debt. It serves too many in this debting game to base the economy on consumer spending. Why does it not seem to matter how much people are saving and not spending? If the nation is strong and secure and the economy is balanced with the average person/household saving a regular amount - wouldn't this make it better for everyone? Isn't it pure insanity for the feds to TAKE money from everyone to GIVE to anyone wanting and able to buy a new car? We just collectively financed the purchase of 700,000 new cars. They couldn't put it in there that that portion of the $4500.00 would be paid back - even interest free? These are no less than irresponsible children running things like this.

And sadly, if the government came out tommorrow with a program to pay for 25% of the cost of a new home, no doubt the majority of you would be scratching and clawing to get your share of it. So, with nice, expensive suits and clothes - you're the consumer's best friend. Right? Just who was "selling" these bad home loans/ home sales that led to the mess we're in? How many of you knew or should have known it was going to cause a lot of grief for a lot of people and weighed that against the kind of easy fast money to be made? The average consumer is smarter over-all and learns fast too. Are you feeding the minds in Washington - encouraging them to belive that throwing billions and billions in cash to plug the holes in this sinking ship is the best idea? Any of you speaking to Washington on what went so wrong and asking who's responsible for it?

Any of you asking how the hell the treasurer could be given the power to write the TARP act which states that his decisions are non-reviewable by any court or administrative body? Any of you even care to know where that money went? The suits and ties that pulled all that off looked and dressed......just.......like..........you! I'm not happy with it. I'm not going to be satisfied until we know where the TARP money has gone. I won't be happy until the supreme court does it's job and orders an investigation into these unconstitutional activities. I wish things were differant - but a business I have worked for 30 years is struggling because of the kind of crap described and asked about above. And I'm only one. One voice and one story. The days of trusting people just because of the way they dress, what they drive and where they lease office space - are over. "Change is on the Way!"...yeah right!

Oct 11, 2009 03:39 AM

#81

Joe Pascal

Joe Pascal - 5 Star Real Estate - Serving Wilmington, N.C. - Wilmington, NC

Maureen,

Top notch post, worthy of being featured. if only for the drawing out of great comments. The role of the federal government in our Capital markets has changed, and we all, as financial professionals, have to carefully discern the new paradigm. what will be the rules of the new system, and how to protect ourselves and the Clients and Customers we advise?

Oct 11, 2009 05:46 AM

Kathie Burby

Coldwell Banker Mother Lode Real Estate - Sonora, CA

REALTOR, SFR, Tuolumne County Real Estate Guide

Maureen - Great Post. You raise some interesting questions and I have to agree with you. Private investors will not be coming back to the mortgage market until the interest rates climb but I am not so sure it will happen as soon as you say. I think we will have to work through the REOs and SS before we see interest rates go up and that could be until mid 2010 (or longer in some areas). Congrats on the feature!

Oct 11, 2009 07:28 AM

Diana Brunner

Keller Williams Realty Monmouth/Ocean - Manalapan, NJ

Good post! Great comments all the way around. I don't think there is too much more I could possibly add. Everything I was going to say was already said.

Oct 11, 2009 08:57 AM

Dianne Hicks

Realty ONE Group - Poway, CA

Great post and presented so well. Does anyone remember interest rates at I believe 18%, we will see that again. Yikes, that is a scary thought but certainly a possiblity. We (at least in my area) has bottomed out and interest rate are fatanstic, buy now or say... soulda coulda woulda but I missed the chance!!!

Oct 11, 2009 09:06 AM

Mark Velasco

West Shores Realty - Whittier, CA

Top Producing Broker Associate

You make a good case Maureen. I will pass this point of view to my clients.

Oct 11, 2009 06:09 PM

Anonymous

Lynn

One local banker cited their 3rd Quarter refi lending utilized not one red cent of the banks assets to fund the mortgages. 100% was Fannie Mae money; they're just going to be a service agency.

The banker went onto say using its own resources wasn't profitable at current 4.6% rates--so the original post question makes a lot of sense....and is answered by thinking about the effects of a gallatic Black Hole!!!

Oct 12, 2009 03:28 AM

#87

Steve Andrascik

Lake Mead Area Realty - Boulder City, NV

Maureen, great post. It is like the government built a house made of match sticks. One wrong move and the whole house collapses.

Oct 12, 2009 05:07 AM

Bryant Tutas

Tutas Towne Realty, Inc and Garden Views Realty, LLC - Winter Garden, FL

Selling Florida one home at a time

Really good article Maureen. I have to come back to make it through all of these comments. This stuff is way out of my area of expertise.

Oct 12, 2009 11:25 AM

Lyn Sims

Schaumburg, IL

Real Estate Broker Retired

Great post Maureen. As you say, how long can it continue? I'm not sure if I agree that they have been kept artificially low and is a less chosen investment. But you do bring up that good question of why not, the 3 biggies, keeping anything they originate?

What happens when the government can no longer prop up the housing market?

Oct 13, 2009 04:47 AM

Anonymous

Elizabeth Lockwood

Dear Maureen:

Our goverment has said to the banks: Take a seat we will do the rest. You can bet that they are making money and they need to to wipe out all the toxic debt they are holding.

Oct 14, 2009 04:01 PM

#91

Anonymous

Lori Malin

Originally the feds were planning on pulling out of guaranteeing so many loans come this December. Strong government backing has been part of the housing stimulous plan, along with the $8K tax credit. From what I am hearing now, this has been extended out to March, with a gradual decrease vs. a sudden pull-out. With higher risk, banks and other lenders will surely compensate by raising interest rates. Good info to pass on to clients on both sides.

Oct 15, 2009 03:35 AM

#92