Mortgage Rate Forecast: Housing recovery needs a stable mortgage market

Mortgage lending today is mostly in the hands of the government. Just about all new home loan financing or refinances are either purchased, securitized or insured by government agencies, the likes of Fannie Mae, Freddie Mac and FHA leading the charge. Then there is the Federal Reserve that has filled the gaping void left by scared and loss-licking private investors in the secondary mortgage market. Without the Fed rolling up its sleeves and operating there that key segment would resemble a person from "Honey, I shrunk the kids." If so, the real estate market as it has been known until now would've basically vaporized.

Repairs to the home loan industry are underway. That's the good news. Underwriting standards have been reworked all across the long list of important steps to get borrowers approved and closed. More skin in the game is now required, employment and assets are much more carefully verified and appraisals get additional scrutiny, among other adjustments. Sometimes, though, the tightening has gone a little too far, denying solid prospects an opportunity to buy a property. Still, stronger guidelines will produce mortgages that are easier to market on the ever-cautious secondary market.

Private investor confidence in residential mortgage paper is still weak, however. Updated underwriting standards help, yes, but much more is needed. Mortgage rating agencies have come under some serious fire for their poor work and for obvious conflict of interest charges in getting paid by the same banks whose paper they were rating. Government regulators have been less than diligent in oversight, not only with rating agencies but many other procedures and rules they were supposed to watch. Pressure is growing from many directions to get new and meaningful laws passed to address the shortcomings in the secondary mortgage market and while that is going on Wall Street is mounting its own campaign to keep any changes to a minimum. As expected. This is surprisingly self-centered.

A vibrant real estate milieu - a strong recovery in essence - calls for a healthy secondary mortgage market. Private investors won't return there until they see substantial changes made that will give them the transparency they are looking for. They are watching and thus far what they see isn't enough. The regulatory upgrades should be introduced rather soon, for the government can be bankrolling just about every mortgage that comes across only for so long. The Fed is set to wind down its program of buying mortgage-backed securities by the end of March, but it may have to extend it, because it seems the private sector wouldn't be stepping in sufficiently to replace it.