Federal Government to Ease Its Involvement in Real Estate

By: Salina Greene, Outreach Coordinator, NHS of Baltimore

Over the past year, the federal government has been instrumental in reviving the housing market by driving down mortgage rates through relief aid. Unfortunately, this is coming to an end this coming March. The government has decided to pull out. The decision to end federal support for mortgage rates will have a deep impact on the Obama administration. If the market thrives, it will be proof that we are heading towards a stable economy. If it falls again, homeowners may face another wave of trouble.

As of last year, the government pledged more than $1 trillion to help new and existing homeowners secure mortgages at the lowest rate possible. Without this aid, millions would not have been able to re-finance their homes, nor could some first-time homebuyers afford their new homes. When the government pulls out, there could be a surge in mortgage rates. To a point, the market has become dependent on the U.S. financial administration’s support in order to stay afloat. If policies change too quickly, the government could lose some creditability with the financial markets. Mortgage rates are the lifeblood of the real estate market. A sharp increase in rates can cause the housing market to stall, as homes become too expensive for many buyers to afford.

Many industry advocates disagree with the government’s decision to withdraw so soon in the current financial crisis. They are concerned with the potential of higher rates and slower housing sales. Although policymakers periodically decide on a base percentage for mortgage rates, the loan rates are largely based on the health of the market.

In the past, banks created large pools of home loans and turned them into mortgage-related securities that were traded on the open market. Investors would purchase these securities, therefore funneling money to potential lenders. When the financial crisis struck, the securities trade froze up. Fearing a major collapse of the housing market, the government stepped in and became the only major buyer of these mortgage-related securities.

Thanks to federal efforts, refinancing and home buying surged. Now, with the government ending their support of low rates, the future of the rates is uncertain. While some feel the government should gradually withdraw from the market, the government is confident the rates will only rise a faction of a percentage point. This will give us some ray of hope during this time of recession.

For more information, go to the U.S. Department of Treasury website: www.ustreas.gov. There are several useful articles on the website relating to home buying and re-financing.