Will mortgage rates soar and snuff out the housing bubble?
Tuesday, February 2, 2010 at 05:29AM Multiple offers and builder waiting lists are sneaking into the $800k price range. Multiple offers are no longer limited to sub-$250k houses. We know low mortgage rates are one reason for the revived housing market. I've thought that interest rates, held artificially low by the government, are sure to head up when the government exits the mortgage market, snuffing out the housing bubble they have recreated.
Not so fast. I was wrong again. It turns out, the Obama Administration's #1 economic tool has been a housing recovery:
Keeping the mortgage rates at historic lows, which required a commitment of more than $1 trillion, was viewed within the administration as a central plank of the economic strategy last year, senior officials said. Though the policy did not attract as much attention as rescue efforts to bail out banks, it helped revitalize home buying in some parts of the country and put money in the pockets of millions of homeowners who were able to refinance into lower monthly payments, the officials added.
There is some debate among insiders and economists about ending the mortgage support. However, nvestors who are seeking higher yields are signaling their intent to buy mortgage bonds and keep interest rates low for San Diego and other home buyers. Why? The mortgage bonds will be guaranteed by the government.
So, more government intervention. They exit the mortgage market at the end of March, and to prevent rates from increasing, they agree to back future bond sales.
Some analysts even suggest that Fannie and Freddie, now with greater government backing, could buy more mortgages if spreads widen drastically and the Fed declines to help.
The reason for the government backing?
On Christmas Eve, Treasury officials announced a move that would cover losses suffered by investors who buy these securities from Fannie Mae and Freddie Mac, which together now back about half of the nation's $12 trillion mortgage market. The goal was simple, officials said. They wanted private investors to be reassured that mortgage securities are safe to buy.
So we are really trading one form of government intervention in the mortgage market for another. The mortgage market remains on life support after all, and reviving the housing bubble and stabilizing house prices seems to the the Administration's #1 economic tool for recovery.

