Obama Administration Plans Exit From Mortgage Markets

Mortgage rates have remained low over the past year as the Obama Administration has used federal support to drive down rates in order to revive home buying. Keeping interest rates at historic lows cost an investment of over $1 trillion and was considered a key ingredient to stabilizing the housing industry and re-booting the economy.

The announcement has been made that the wind-down of government support for mortgage rates has begun and will be completed within two months. "We did what we thought was necessary to stabilize the market, but we don't think the government should continue special efforts forever," said Michael S. Barr, an assistant secretary at the Treasury Department. "As you bring stability, private participants come back in. We do expect this now that the market has stabilized. I'm not going to say there will be no effect on rates, but we do think you are seeing market signs and market signals that there should be an orderly transition."

This will be the test of whether the Obama administration and the Federal Reserve have succeeded in jump-starting the housing market and ensuring it can hold its own. What will be interesting is to see the impact it will have on interest rates in both the immediate and long term future. The mortgage industry depends on the private sector to fund it via mortgage-related securities. As the economy softened, the Fed and Treasury became the only major buyer of these securities. At the same time, the federal government stood behind mortgage-finance companies Fannie Mae and Freddie Mac by taking them over and pledging to cover their losses. Has the mortgage industry become too dependent on government support? In our dialogs with both buyers and sellers, financing is a key ingredient to any transaction. We are seeing more requests for All Cash, Seller Financing or Lease/Purchase to generate more creative ways to navigate the financing issue.

As the economy began to recover, the Treasury ended its purchase of these securities in December and the Fed is winding down it purchases to end March 31st. We will be watching closely to see the impact this will have in our market.