Housing market not out of the woods — yet

John W. Schoen Senior producer • Profile • E-mail

The government’s historic takeover of mortgage giants Fannie Mae and Freddie Mac is an important step in clearing up the mortgage mess that has cratered the housing market, panicked investors and sent the economy reeling. But homeowners, taxpayers and consumers are not out of the woods, yet.

The move is designed to tune up the sputtering twin engines of the mortgage market — Fannie and Freddie combined hold or guarantee more than $5 trillion in mortgages, or about half of all U.S. mortgages.

Fannie and Freddie's woes had begun to drive mortgage rates higher — the last thing the housing market needed — as investors began shying away from lending more money to the two giant companies.

The weekend takeover by the government helped allay the worst fears on Wall Street: that the mortgage companies might default on their obligations, touching off another earthquake in the financial markets. Stocks rallied around the world Monday on news of the takeover.

Stocks had been under pressure because of "Armageddon scenario" that now seems far less likely, said Paul McCulley, a portfolio manager at PIMCO, which has major holdings in mortgage-backed bonds. "And therefore they should rally and are rallying," he said.

By easing fears in the bond market, the government’s takeover should also bring mortgage rates back down again. That’s good news for anyone looking to buy a home or refinance a mortgage.

But while lower mortgage rates could spark some demand for houses, it won't do anything to slow the current wave of mortgage defaults and foreclosures that have left the market glutted with unsold homes.

Foreclosed properties often are sold at a discount by banks trying to unload them before prices fall further, putting more downward pressure on the market. Last week the Mortgage Bankers Association reported that a record 9 percent of American homeowners with mortgages were either behind on their payments or in foreclosure at the end of June.

While the Treasury’s action will help home buyers shopping for a mortgage, there are no immediate plans to provide additional help to the millions of homeowners with loans that they can’t afford.

So far efforts to provide direct government assistance to homeowners at risk of default have faced numerous roadblocks. The Hope Now Alliance, a voluntary program to induce lenders to work out more affordable loans has helped relatively few.

After more than a year of debate, Congress this summer passed a housing relief bill that was signed by President Bush but is expected to help only several hundred thousand of the more than two million homeowners at risk of losing their homes.

Much of the debate over the housing bill centered on the issue of whether the government should use tax dollars to “bail out”  homeowners who got in trouble — an approach the White House opposed. The bailout of Freddie and Fannie may help shift that debate to favor more aggressive action on behalf of homeowners.

In any case, until the tide of rising foreclosures turns, the overhang on the housing market will further delay its recovery.

“If (the government) takes over this debt, and they start working with distressed borrowers to help them extend terms and lower interest rates to keep people in those houses, then this is another big positive that could come out of this,” said Andrew Busch, an investment adviser with BMO Capital Markets. “Getting those additional homes off the market would help stabilize the housing market. That's where a huge bang for the buck could come in here — if somebody's smart enough to take advantage of this and start talking about it.”

Though the move will likely lower mortgage interest rates, it’s not clear how much impact the takeover will have on spurring bankers to make new loans. Without convincing evidence that house prices have bottomed, bankers will remain reluctant to lend money to someone who wants to buy a house that may be falling in value.

“On Main Street, we still have the reality of deflating home prices," said PIMCO's McCulley. "And this whole  process of getting affordable mortgage availability to stop the rot in the property market is going to have that to play out over time."

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