The federal government’s grip on the nation’s housing finance will remain both a hug and a stranglehold, at least for the near term.
Despite strengths in the housing recovery, a sudden withdrawal of the government out of the market would prove catastrophic. The truth is, however, that the United States couldn’t get out of the housing market, even if it wanted to.
“Several factors are delaying the government from stepping away,” said Standard & Poor’s credit analyst Matthew Albrecht. “Despite recent signs that home prices are stabilizing in some areas, the housing market is still dealing with an overhang of inventory, high nonperforming loan rates, and few qualified new borrowers.”
Numerous analysts and policy makers called for government to get out of housing after the crash. But four years later, federal agencies remain a dominant force in the nation’s mortgage finance system.
Of all the outstanding loans – securitized and unsecuritized – Fannie Mae, Freddie Mac and the Federal Housing Administration hold, manage or back 85% to 95% of the marketplace, said Doug Duncan, chief economist for Fannie Mae.
Aside from the GSEs, homeowners are relying on what has been referred to as the Alphabet-soup of housing programs, which includes everything from the Home Affordable Modification Program to the Home Affordable Refinance Program. And despite G-fees being lifted on GSE loans to create a more level playing field for private capital, most players from outside the government are waiting on the sidelines, according to Duncan. Standard & Poor’s highlighted this strange dichotomy in a research report Wednesday. It’s now close to two years after the Treasury released a white paper saying it wanted to wind down the GSEs to rebuild a mortgage finance system supported by more private capital. But today’s housing landscape is coasting along with very little influence from private players.
S&P’s Albrecht added that the government’s ongoing support of Fannie Mae and Freddie Mac only reconfirms his belief the agencies play a critical role in overall housing policy.
“Although future policy changes could affect our ratings on Fannie Mae and Freddie Mac, we do not expect any substantial policy changes until a more sustainable market recovery is in place,” said Albrecht.
Either way you look at it, government is entrenched in housing and could stay there for a while, analysts noted.
“There is no question that government is deeply involved,” said Duncan with Fannie Mae. “What the impact of that will be is something that will be debated over time, and there are now various forms of intervention.”
Specifically, the new crisis brought new rescue schemes from the monetary policy side of the house when the Fed agreed to buy another $40 billion a month in mortgage-backed securities, Duncan said. “Until this recent financial crisis, the Fed has never bought anything but Treasuries.”
Duncan views the MBS acquisitions as evidence that the Fed is committed to housing and views the purchases as an attempt to stimulate housing by raising home prices and improving cash flows on household balance sheets.
As for why private capital is stalled on the sidelines? Duncan says an influx of housing rules make it difficult for the market to find clarity.
“Simply all of the changes underway make it uncertain, so holders of private capital are being conservative about it.”