I'm torn on this issue but believe the Feds will step back in at some point. The Fed's have spent massive amounts of money - 1.25 trillion dollars - purchasing fannie mae and ginnie mae mortgage backed securities. They have been the single biggest purchaser, as I understand, investing millions and even billions of dollars per trade on mortgage backed securities. It appears as though they believe their need for involvement in the securites market would dimish to the point that tradional investors would be able to buoy pricing, and keep mortgage rates from spiking up dramatically.
Most economists however are excpecting current mortgage rates to increase rapidly. This would preclude many potential home buyers from qualifying for financing to purchase a home. Both Fannie Mae and Freddie Mac have implemented maximum debt to income ratios allowed under conforming and conventional financing. As rates move higher more and more potential home buyers will be excluded from purchasing a home, as current mortgage rates will increase and eliminate their ability to obtain financing. The very reason the feds began the MBS purchase program was to stimulate the housing market which in turn stimulates the economy.
The economy in general follows housing. Peaks and Valleys in the housing market have traditionally been a good indicator of how the economy will react. However, even though the Feds have indicated they are ending the MBS purchase program - MBS pricing has remained fairly stable and has seen some improvements in last 2 days as debate has been increasing over whether or not they will actually terminate the program. The Feds have gone on record as stating the program will end in March, but they have also said they will renew the MBS purchase program if the need for a second round of purchases arises.
They have given Fannie Mae a "blank check" to do with basically whatever they want in order to try and offset the need for thier involvement in the Mortgage Backed Securities Market. Barney Frank is calling for an end to Fannie Mae but most people understand that a Fannie Mae collapse would have massive detrimental effects on the housing market. Fannie Mae is using this money and is buying up defualted Fannie Mae Mortgage Backed securities which I believe will make new issues moving forward more valuable to investors, allowing secondary marketing departments to push rates lower. We have seen this in the past couple of days with improved pricing in the current fannie mae mortgage backed securities market and on investor rate sheet pricing.
I do not think this however will be enough to offset the feds walking away from the MBS market for good. Fannie Mae and the home buyer tax credit alone will not be enough especially given the fact that home prices are predicted to fall again in 2010 for many major markets. Refinancing activity has already decreased dramatically and this activity helps spur spending and the economy to a certain degree, along with home buying. Potential buyers will be elmininated from qualifying based on higher debt to income ratios due to higher rates. It is my belief that at some point the feds will have to step in again and renew the current MBS purchase program, or begin a completely new version of the current MBS purchase program. Thanks.