Mortgage Insights Blog

Ask any economist these days and they’ll tell you that housing recovery is the key to economic recovery in this country, and history has always proven this. So with this week’s announcement by the Fed that it would purchase mortgage-backed securities from Fannie Mae, Freddie Mac, and Ginnie Mae for up to $500 billion, we’re seeing some more renewed hope to a quick housing recovery in 2009.

The Plan

The Fed’s plan is to purchase another $500 billion in mortgage-backed securities, which consist of mortgage loans that are packaged together and sold to investors. These securities, viewed as toxic now because so many mortgages are going unpaid, are at the heart of what’s weighing down troubled banks. Purchasing them is intended to free up bank lending, which would spur the economy.

In addition, Secretary Paulson said Treasury will provide $20 billion of credit protection to the Fed from last month’s $700 billion financial rescue package. The protection will be part of a new Fed program that could lend as much as $200 billion to investors in securities backed by credit card, auto and other loans.

Compounding the problem, he said, was that “credit card rates are climbing, making it more expensive for families to finance everyday purchases. This lack of affordable consumer credit undermines consumer spending (and) as a result weakens our economy.”

The Intended Results

The supporters of the Fed decision say that it will directly bring down long-term interest rates because it will give banks renewed resources to lend and investors reason to start buying mortgage backed securities again. And as we’ve seen in past recessions, home sales rise when mortgage interest rates fall.

With long-term treasury bonds sinking to all new lows, investors will reach a point where they will demand higher returns, and right now the only other securities offering higher returns are mortgage backed securities. But this has been the heart of the problem all along – investors have been reluctant to invest in these securities because of the recent history of many of these securities going unpaid by borrowers.

If the Fed starts to directly purchase these underperforming securities from the GSE’s and their investors, the hope is that it will stimulate investor confidence to purchase more and help bring liquidity back to the mortgage market. And with an increase to the level of investment, it should be aggressive enough to bring interest rates down in a meaningful manner.

Lawrence Yun, NAR chief economist, said purchasing debt obligations of Fannie and Freddie is an important move. “We commend the Fed decision because it will directly bring down long-term interest rates,” he said. “The level of investment should be aggressive enough to bring interest rates down in a meaningful manner and if we see mortgage interest rates drop by even 1 percentage point, it could increase homes sales by up to 500,000 units. That should help to draw inventory down and stabilize prices.”

Yun said higher home sales are critical now to absorb inventory and stabilize prices. “Only with stabilization in home prices can we have a healthy housing and economic recovery.”

For more information on the possible impact for our local housing industry I have provided a linkt to the San Jose Mercury’s news article distributed this morning - http://www.mercurynews.com/ci_11133357