Jim McKinley and his wife were eager to refinance their Placentia home last… (Don Bartletti / Los Angeles )
Reporting from Washington and Los Angeles — Uncle Sam is trying to get out of the business of running the U.S. mortgage market. The trick will be withdrawing support without toppling the nation's fragile housing recovery in the process.
The government rescued the sector last year with a series of unprecedented measures that staved off a catastrophic collapse, including pumping more than $1 trillion into home loans. But Washington now has effective control of the housing market, either owning or guaranteeing an estimated 9 out of 10 new mortgages.
That has critics worried that the government has asserted too much control over a critical segment of the economy while inflating the federal deficit at what some consider an alarming pace. Pressure is building on the Obama administration to scale back a variety of stimulus efforts.
In comments released Wednesday, Federal Reserve Chairman Ben S. Bernanke outlined a broad strategy for eventually tightening credit. Bernanke had been scheduled to testify on the plan before Congress, but his appearance was postponed by the heavy East Coast snowstorm.
He talked only vaguely about when the central bank might act, sprinkling his remarks with phrases such as "in due course" and "at some point."
"We have spent considerable effort in developing the tools we will need to remove policy accommodation, and we are fully confident that at the appropriate time we will be able to do so effectively," he said.
For the housing market, the plan to scale back support carries an inherent risk: that it could stall the very housing recovery that the government has worked so feverishly to jump-start.
"We understand that stimulus can't continue forever, but at the same time, trying to get the housing market back on track is key to a broader economic recovery," said Lawrence Yun, chief economist for the National Assn. of Realtors. "This policy is having that intended impact. Policymakers should be cautious about how soon to end it."
The Fed plans next month to end a $1.25-trillion mortgage-bond-purchase program that has helped keep mortgage interest rates near a record-low 5%. The Fed has been buying virtually all the mortgage bonds churned out by mortgage giants Fannie Mae and Freddie Mac, replacing private investors such as pension funds and mutual funds that have shied away since the sub-prime mortgage crisis.
That exit is expected to push up rates, which could weigh on buyers at a time of high unemployment and anemic consumer spending.
The Mortgage Bankers Assn., an industry trade group, predicts the end of the Fed mortgage-bond program could push rates up by roughly 0.5%. For a $500,000 fixed-rate mortgage, that would increase the monthly payment by $155.
Even a moderate rise could push potential buyers such as Erin Sorensen out of the market.
The 29-year-old museum educator and her husband have been trying for months to find a moderately priced home in West Los Angeles.
"If interest rates go up, there's really no hope for us in getting a home," Sorensen said.
Higher rates could force many others to recalculate where to live or what to purchase.
"If those rates jump up to 5.5% or 6%, then [buyers] can't qualify for what they thought they could qualify for, and they're not going to be able to buy as much house as they thought they could," said Frank Drury, a loan originator at Cobalt Financial Corp. in Huntington Beach.
A popular home buyer's tax credit is scheduled to lapse at the end of April. It provides tax breaks of up to $8,000 to first-time buyers and up to $6,500 for some homeowners who move up to middle-market homes costing up to $800,000. The credits were originally scheduled to lapse in November, but were extended over concerns that home sales would slow without the incentive.
There is already evidence that could occur. In December, home resales skidded almost 17% after buyers sped up their purchases the month before to make sure they qualified for the subsidy before the expiration of the original deadline.
Even with the elimination of the programs, the government would remain deeply involved in housing and would maintain several key pillars that have propped up the market. Those include expanded Federal Housing Administration programs popular in Southern California, as well as enhanced support of Fannie Mae and Freddie Mac.
Still, "it is one of what will ultimately be many steps by the government to start to take back its unprecedented support for the housing and mortgage markets," said Thomas A. Lawler, founder of research firm Lawler Economic & Housing Consulting. "There will be more."
Ending the Fed's near-total control of the market could help spur investors to reenter the market.
"My sense is [government officials] desperately want to get out of this program," said Keith Gumbinger, vice president at mortgage research firm HSH Associates. "The longer this goes on, the less likely that the private marketplace will jump back in any time soon."