Since the housing market went belly-up and took Wall Street down with it, the Federal Reserve has been doing all it can to bail out the industry and provide liquidity in the system. The buying up of U.S. Treasuries and government-backed mortgage backed securities (MBS) has been the Fed’s focus.

But as the housing market has started to show signs of life again, the Fed has announced plans to slow down its purchases of Treasuries. It seems to be considering a similar plan with mortgage debt.

“I think something similar might be possible for MBS, but no decision has been made,” said St. Louis Federal Reserve Bank President James Bullard in Little Rock, Arkansas on Thursday. “I think we agreed that on the Treasuries we’d do the tapering thing and see how it works. We can decide some time during the fall how we want to do the MBS.”

And Richmond Fed President Jeffrey Lacker said Thursday in Danville, Virginia:

“I will be evaluating carefully whether we need or want the additional stimulus that purchasing the full amount authorized under our agency mortgage-backed securities purchase program would provide.”

Originally the Fed was prepared to buy up to $1.25 trillion of MBS, but has spent just over $792 billion so far of securities backed by Fannie Mae, Freddie Mac, and Ginnie Mae.

Some people are excited about the possibility of an early exit strategy for the Fed, saying it will open the door for private investors to take over again. Others are not sure the markets are ready for the pullout.
For example Larry Doyle, on the Wall Street Pit blog says:

While Fed governor Lacker would maintain that the Fed may slow its purchasing of MBS because the economy has improved and continues to improve, I would beg to differ. Home sales are rebounding, but delinquencies and foreclosures are running at record pace. Those statistics, in my opinion, continue to cast dark clouds on our housing landscape.

He also predicts that mortgage rates will move higher as a result, probably in the range of 0.50 percent to 0.75 percent, a move that could put a serious damper on the recent flow of home purchase activity.

With the summer sun slowly setting in the distance, the US housing market is preparing itself for a potentially rough winter. The warm weather of summer typically causes a flurry of frenetic activity in the property industry and despite the current economic climate there have been some encouraging signs during the summer months. This positive momentum has led some experts to predict that a period of stabilization might not be too far away. Indeed, Professor Jeffrey Fisher of Indiana University Kelley School of Business is optimistic about the immediate future of the housing market, stating that he believes, “the worst is behind us.” Professor Fisher’s optimism isn’t shared by everyone, though, and many see the recent boom in activity as the calm before another impending storm.

With the Recovery and Reinvestment Act 2009 due to end in November, many are predicting a drop-off in the number of first-time home buyers and the lack of new capital in the market could cause another mini-slump. With only three months left until the tax credit expires, the race is on for first-time purchasers to get a much needed leg-up into the housing market. If you’re considering making your first purchase, here’s what you need to know before applying:

• The tax credit is for first-time home buyers only. For the tax credit program, the IRS defines a first-time home buyer as someone who has not owned a principal residence during the three-year period prior to the purchase.
• The tax credit does not have to be repaid.
• The tax credit is equal to 10 percent of the home’s purchase price up to a maximum of $8,000.
• The credit is available for homes purchased on or after January 1, 2009 and before December 1, 2009.
• Single taxpayers with incomes up to $75,000 and married couples with incomes up to $150,000 qualify for the full tax credit.

(Source - FederalHousingTaxCredit.com)

The tax credit may have provided a much need shot in the arm for the housing market but the scheme isn’t enough to provide a lasting cure for the industry. Late mortgage payments reached a record high in the second quarter of this year and with a steady rise in the number of foreclosures it seems the road to recovery will continue to be slow. Some predict the slump to last until mid-2010: “A rise in foreclosures will keep the housing recovery slow and weak, and will continue to place downward pressure on house prices until mid-2010, but at least the end is in sight.” (Celia Chen, senior director of housing at MoodysEconomy.com)

The bottom line for prospective home buyers is to tread carefully over the next few months. While the recent boom has had some positive impact on the market, the overall affect is marginal and with the tax credit soon to end the winter looks to be an unsettled period. Buying a home in the current climate is risky business but if current predictions are accurate the forecast for 2010 should be a lot more pleasant for those wanting to take their first steps on the property ladder.

Well last week we had good news – this week it looks like more bad news. A new study conducted by Fitch Ratings Ltd. and reported in the Wall Street Journal found that home owners who start to miss mortgage payments are not that likely to get caught up again.

The report looked at the “cure rate,” or the percentage of delinquent home loans that are brought current each month (The study did not include government-backed loans and loans not bundled into securities. This means only about 16 percent of all U.S. mortgages are represented in the report).

The numbers are bleak when compared on a historical scale, an indication that those predicting millions more foreclosures in the next couple years may be right. In July of this year the cure rate for delinquent prime loans fell to 6.6 percent. Compare that with an average of 45 percent during the period of 2000 to 2006. Yikes!  Subprime loans had a cure rate of 5.3 percent in July, a major decrease from the average of 19.4 percent in the six-year time frame.

Fitch blamed job loss as a major contributing factor to the collapsed rates. Yet one of the main differences in borrowers now as opposed to those in the past is that even many who can afford to make their payments are simply choosing not to, feeling that their underwater mortgages are not worth saving.

Unfortunately, in some cases they may be right. As the bloated housing markets of former real estate hot spots continue to correct themselves, home prices are often still moving downward, making a $500,000 mortgage on a home now worth roughly half that amount seem like a hopeless cause. Some homeowners make think, “Why keep paying this impossibly high mortgage, when I can go into foreclosure, rent and repair my credit for several years and then buy at reasonable market prices?”

And for those of us living in those places like California and Florida waiting to buy homes, as sad as foreclosure can be, each one helps to bring the home prices back down into an affordable range. Sorry to those unlucky enough to have bought or done cash-out refis during the housing bubble, but the rate of growth was never sustainable and a painful recovery was always going to be the end product.

A majority of the nations’ states saw an increase in their existing home sales during the second quarter of this year. Those sales jumps came at the cost of median home price decreases in 129 out of the 155 metropolitan areas monitored by the National Association of Realtors.

Still, this news is very encouraging for the overall housing market, according to Lawrence Yun, NAR chief economist.

“With low interest rates, lower home prices and a first-time buyer tax credit, we’ve been seeing healthy increases in home sales, which are a hopeful sign for the economy,” he said.  “There have been sustained sales gains in Arizona, Nevada and Florida, as well as diverse areas such as Maryland, the District of Columbia and Nebraska.  More recently, we’ve seen strong double-digit gains in Idaho, Utah, New Mexico, Washington, Hawaii, New York, New Jersey, Maine, Vermont, Wisconsin, Indiana, South Dakota and Montana.”

This can only mean good things for the economy as well, Yun said.  “Given the need for related goods and services, each home sale pumps an additional $63,000 into the economy – that’s how the housing engine traditionally pulls us out of recession.  In addition, sales are drawing down inventory and that will help stabilize home values, which in turn will lessen foreclosure pressure and boost credit availability for other sectors of the economy.”

Existing home sales on average were up 3.8 percent during the second quarter to 4.76 million units from 4.58 million homes during the first three months of the year. The national median home price fell to $174,100, a 15.6 percent drop from the second quarter of 2008.

So home prices continue to fall but inventory is down and there is much more movement in the market. A report is due out within the next few weeks about home sales from July and an increase would mean four straight months of sales growth. It’s hard not to feel hopeful after such improvement.

Somehow foreclosures do not seem to be having the same terrible impact on the housing market as they have previously in this recession. Freddie Mac announced today that long term mortgage interest rates rose in the past week. The average rate on a 30-year fixed rate loan grew to 5.29 percent excluding points, up from 5.22 percent the previous week. Both 15-year FRM loan rates and one-year ARM rates also moved upward. Freddie Mac VP and chief economist Frank Nothaft said the increase was due to better than expected employment reports as well as rising home prices in 17 percent of the nation’s major metro areas.

Yet even as the housing and economic picture is starting to look rosier in many respects, in one particular aspect things are only getting worse. Foreclosure filings in July set a new record high with filings jumping up 7 percent from June and up 32 percent from the previous year, according to RealtyTrac Thursday.  That means one in every 355 American home-owning households received some sort of foreclosure notice last month.

“July marks the third time in the last five months where we’ve seen a new record set for foreclosure activity,” James J. Saccacio, RealtyTrac’s chief executive, said in a statement.

“Despite continued efforts by the federal government and state governments to patch together a safety net for distressed homeowners, we’re seeing significant growth in both the initial notices of default and in the bank repossessions.”

The current unemployment rate is 9.4 percent and could reach 10 percent in the coming year.
So where is the disconnect? Why are these growing foreclosures not affecting the markets the same way as they did in the previous months. Interest rate movement would suggest that everything is getting better in the housing market. Are these continued foreclosures not going to affect home prices anymore? How can the housing market recover when foreclosures continue to rise? Perhaps next week’s rate will reflect this latest report.

The Federal Reserve’s Federal Open Market Committee meets again this Tuesday and Wednesday to decide the fate of its target interest rate, currently set at the range of zero to 0.25 percent. There is very little concern that the Fed will raise its rates this week, as the economy continues to teeter. Here’s what committee members have been saying recently according to Reuters:

• NEW YORK FED PRESIDENT WILLIAM DUDLEY, JULY 29:

 ”Credit availability will be constrained for some time to come, and this will serve to limit the pace of the recovery. “

• SAN FRANCISCO FED PRESIDENT JANET YELLEN, JULY 28:

 ”We glimpse the first solid signs that economic growth may be poised to resume. Indeed, I expect that to happen some time this year … I can assure you that we will act decisively and appropriately to tighten the stance of monetary policy and maintain price stability.”

•  FED CHAIRMAN BEN BERNANKE, JULY 21:

“Accommodative policies will likely be warranted for an extended period. At some point, however, as economic recovery takes hold, we will need to tighten monetary policy to prevent the emergence of an inflation problem down the road.”

• ATLANTA FED PRESIDENT DENNIS LOCKHART, JULY 20:

“The recovery will be weak because the economy must make structural adjustments before the healthiest possible rate of growth can be achieved. While this adjustment process is going on in the medium term, I believe inflation and deflation are roughly equal risks and require careful monitoring.”

So will a decision to do nothing affect mortgage interest rates this week? It just might, based on the Fed’s meeting comments.  If the group says it is worried about inflation, rates could rise. If it seems pessimistic about the economy’s next six weeks, rates might drop.

Just when we thought the housing market was on the way to recovery, Deutsche Bank comes out with a research survey saying that the number of underwater mortgages is going double over the next year and a half until 48 percent of all homeowners owe more than their home is worth.

Here’s what they found:

• 41 percent of prime conforming loans will be underwater by the first quarter of 2011. Only 16 percent were underwater by the end of the 2009 first quarter. They make up two-thirds of all U.S. mortgages.
• 46 percent of prime jumbo loans will be underwater, up from 29 percent in the first three months of 2009. Jumbo loans make up 13 percent of the total market share of loans and “the impact of this is significant given that these [jumbo] markets have the largest share of the total mortgage market outstanding,” the analysts said.
• 69 percent of subprime loans with be greater than the property value, up from 50 percent this past March.
• 89 percent of risky option adjustable-rate mortgages will be underwater in 2011, up from 77 percent.
• Home prices are expected to drop on average 14 percent from now to first quarter of 2011 in the 100 largest U.S. metro areas, for total average drop of 41.7 percent since the beginning of the housing crash.
• The top 5 hardest hit states are likely to be California, Florida, Arizona, Nevada, and Ohio.
  The major danger of this forecast coming true is that is will likely lead to millions more foreclosures, which could hold back a true housing market recovery.

And all this just when we were getting excited about home sales rising for several months, prices stabilizing, and housing inventory shrinking!

A recent study from the Boston College Center for Retirement Research shows that today more Americans than ever are carrying a mortgage into their retirement years. The research found that among those in the age 60 to 69 age group, 41 percent were still making mortgage payments. Interestingly, one out of two of those retired mortgage borrowers has enough in investments and savings to pay off the mortgage in full right now.

So why would they hold on to those monthly payments? The study suggests that many believe it is better to keep the home loan and the associated tax benefits in order to keep their wealth more liquid. While there are many people who obviously feel this is the smarter path, the research study concluded that investing in retirement years without having paid off the mortgage is essentially investing with borrowed money. I think that makes sense; if there was a financial emergency, the liquid funds and investments would be used up and there would be no money left to pay the mortgage. The home could be foreclosed on and the retirees could find themselves homeless.

For me it would truly be about peace of mind. I know that financially savvy individuals can use tax credits to their advantage as they deftly maneuver the stocks and bonds scene, but there is plenty of emotional relief that comes from having something as big as a house paid off in full. I am sure you can still make your money work really well for you even if you first pay off your mortgage and then go crazy with investing.

The study doesn’t really address the 20 percent of retired 60 to 69-year-olds that do not currently have the money to pay off their home loans. That is obviously a much more precarious situation. Social security is not usually enough to cover a mortgage payment in addition to living expenses. Will the next big foreclosure wave come in the next decade as seventy-somethings run out of money?