Today, the Obama administration announced two new programs to help a small segment of the U.S. housing industry get back on its feet, all with the promise that the taxpayer will not have to foot the bill.

HFAs Getting Help:
State and local housing finance agencies, also known as HFAs. They originate home loans for first-time homebuyers and lower-income buyers. They also provide refinance loans for rental properties. According to National Council of State Housing Agencies President Susan Dewey, the HFAs create between 100,000 and 200,000 new mortgages every year (this represents about 1 percent of the total mortgage market). They are also known for making very safe long-term loans with very low default rates. “Performance of HFA loans has materially outperformed most other loan types, especially when controlling for borrower profile,” according to a Treasury Department fact sheet. They create tax-exempt bonds based on their mortgage securities to pay for their operations.

Why HFAs Need Help:
Dewey says the HFAs have only issued $4 billion in bonds this year. In 2008 they issued $10 billion and in 2007 the total was $16 billion.

“With the market upheaval, we’ve been unable to sell new mortgage bonds for a year,” Bob Kucab, the executive director of the North Carolina Housing Finance Agency, said in a statement accompanying the release. “Despite all the ingenuity we can muster, we’re now helping only about a quarter as many first-time buyers as normal.”

The Obama/Treasury Plan:
1. The Treasury Department will buy HFA-backed securities issued by government controlled finance giants Freddie Mac and Fannie Mae.
2. Freddie and Fannie will provide the HFAs with a credit program to refinance the debt from their existing bonds at better rates and terms.

The hope is that these measures will provide the HFAs will the money needed to fund more new mortgages.

The Cost:
The HFAs will pay fees to participate in the new programs, which will supposedly cover the costs, but some reports have said that the initiative could cost taxpayers as much as $35 billion.

Treasury Assistant Secretary for Financial Institutions Michael Barr said there are some risks involved, but he didn’t expect taxpayers to take any losses for these programs.

“The expected cost to the government is zero,” Barr said of both programs. It seems unlikely, but perhaps…

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.

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 new report from two prominent academic economists predicts the U.S. housing market downtown will not bottom out until 2010.

The report entitled, “The Aftermath of Financial Crises” authored by University of Maryland economist Carmen Reinhart and Harvard economist Kenneth Rogoff, suggested that the nation’s unemployment rate may sink to 11 percent or lower by the end of next year. Such numbers would result in a loss of 6 million to 7 million jobs during that time. The current unemployment rate, as of November 2008, was 6.7 percent.

As the housing and mortgage markets continue their descent and unemployment continues to rise, the national debt will likely rise to historic levels.

“The big drivers of debt increases are the inevitable collapse in tax revenues that governments suffer in the wake of deep and prolonged output contractions, as well as often ambitious countercyclical fiscal policies aimed at mitigating the downturn,” the authors said. “The much ballyhooed bank bailout costs are, in several cases, only a relatively minor contributor to post–financial crisis debt burdens.”

The report, presented at the annual meeting of the American Economic Association in San Francisco, noted that even dramatic actions by the Federal Reserve may not be enough to shorten the downward housing spiral.

“Some central banks have already shown an aggressiveness to act that was notably absent in the 1930s,” they said. “On the other hand, one would be wise not to push too far the conceit that we are smarter than our predecessors.”

In fact, the Federal Reserve increased its efforts Monday with the purchase of mortgage-backed securities that were backed by Fannie Mae, Freddie Mac, and Ginnie Mae.  According to Fed statements, the central bank may buy up to one-ninth of all the outstanding MBS bonds sold by the three government-sponsored companies. Promises to buy such bonds have already caused mortgage rates to plummet and home mortgage applications to rise.

Uncertainty among lenders and investors about the near future of the economy led to a rise in U.S. mortgage interest rates in the latest week, according to a recent survey from mortgage giant Freddie Mac.

During the week ended Sept. 25, 2008, the average rate on a 30-year fixed rate home loan climbed up to 6.09 percent, excluding points, from 5.78 percent the week before. One year ago, the average rate rested much higher still at 6.42 percent.

“Mortgage rates followed Treasury bond yields higher this week amid market uncertainty over the current state of the economy,” said Frank Nothaft, Freddie Mac vice president and chief economist. “Compared with last Thursday, 10-year Treasury yields are up about 0.3 percentage points, and 30-year fixed-rate loans moved up about the same amount. And while up, interest rates for 30-year FRMs are still more than 0.5 percentage points below this year’s peak of 6.63 percent set the week of July 24th.”

Nothaft also cited other market indicators as cause for the increasing rates. Because soft economic data is often reflected in national mortgage rates, he mentioned that home prices dropped 5.3 percent during the year ended in July according to the Federal Housing Finance Agency’s index. The National Association of Realtors similarly announced a 9.7 decrease in the August median sales price for existing single-family homes, a clear sign that the housing market has not yet hit bottom.

Rates on 15-year fixed rate mortgages also shot up in the past week, reaching 5.77 percent, excluding points, from 5.35 percent the previous week. One year earlier, the average rate was 6.09 percent.

The average rates on both five-year and one-year Treasury-indexed adjustable rate mortgages (ARMs) also increased, with five-year ARMs growing to 6.02 percent from 5.67 percent and one-year ARMs averaging 5.16 percent, up from 5.03 percent the a week earlier. Last year at the same time, the average rates for five-year ARMs and one-year ARMs were 6.15 percent and 5.60 percent, respectively.

Even in the face of rising inflation, the Federal Reserve is unlikely to raise their target interest rate through the end of 2008, based on comments Friday from Fed Chairman Ben Bernanke.

“The Federal Open Market Committee (FOMC) has maintained a relatively low target for the federal funds rate despite an increase in inflationary pressures,” Bernanke said in a speech at the annual economic symposium in Jackson Hole, Wyoming. He explained that this strategy is based on the Fed’s expectation “that the prices of oil and other commodities would ultimately stabilize… and that this outcome…would foster a return to price stability in the medium run.”

Bernanke went on to say that he is encouraged by the “recent decline in commodity prices, as well as the increased stability of the dollar,” and that,  if the Fed does not interfere by increasing its interest rate, these conditions would lead to a better pace of inflation by the beginning of next year.

During the past year, the Federal Reserve has decreased its federal funds rate from 5.25 percent to 2 percent, in response to meltdowns in the financial and mortgage markets. Yet because of lower interest rates as well as soaring oil and food prices, consumer inflation has risen from 2 percent to a rate of 5.6 percent during the same period.

In order to get inflation under control, some on the Fed board say an increase in the target rate is the only solution. “If we don’t reverse our accommodative stance sooner rather than later, we will face rising inflation, which may be costly to deal with,” Philadelphia Federal Reserve Charles Plosser said in an interview published  Monday in the New York Times.

Still others support Bernanke’s position, saying that most economic players, particularly mortgage lenders and bankers, are not ready for a rate hike. Janet Yellen, president of the San Francisco Fed argued, “Lenders have been hit by a shock so severe that they are contracting and withdrawing from private sector lending.”

The FOMC meets again in mid-September to determine if any interest rate changes are necessary.