Special Mortgage Programs Extended; Where is Housing Really Heading?

At a time when it appears that housing market is in recovery, special mortgage programs have been extended to help struggling homeowners.

Last week, the White House announced the extension of its housing relief program, The Home Affordable Modification Program (HAMP), until the end of 2015. The program was originally set to sunset at the end of 2013. In addition, the Home Affordable Refinance Program (HARP) has also been extended to the end of 2015. HARP refinances are available for loans that were sold to Fannie Mae or Freddie Mac prior to June 1, 2009.

The questions remain, will these two programs be needed for two more years? Where is housing really heading? According to the S&P/Case-Shiller index of property values, home prices rose 10.9% for the 12 month period March 2012 through March 2013 and was the highest jump seen since April of 2006. However, home prices remain low when compared to the peak reached in 2006. In another report, CoreLogic's home price index showed the largest gain, up 12.1%, in seven years with 14 straight months of increases in home prices across the nation for the month of April. This appears to be making consumers happy; Consumer Confidence is up to 76.2, the highest since February 2008, according to the Conference Board, and is due to improving housing markets, economy and jobs. If everything is moving forward, why would these programs need to be extended for not one, but two years? Will it take two years for everyone to rise above underwater mortgages?

Just as we enter the busy home buying season, mortgage rates are becoming unpredictable. The Feds have hinted at pulling back on QE3 and bond purchases which, even though they haven't started to do it, sent markets into volatile territory. Stocks have been rising with the release of poor data as investors hope that dropping bonds will make the Feds continue with QE3. At this time, rising mortgage rates combined with rising home prices can have a major impact on the affordability of home purchases. When combining these two factors, many people may no longer be able to qualify for a home purchase even if they are employed since incomes have not yet recovered at the same pace. According to the Commerce Department, Personal Income for April remained unchanged. In the past, many borrowers turned to the FHA mortgage program in order to purchase a home, however, even FHA has made their guidelines stricter which will eliminate many potential home buyers.

In addition, rising home prices may put an end to investor purchases. The reality is that big corporate investors are primarily interested in low priced homes for rentals. Private investors are also drawn to low priced homes for purposes of flipping. Higher home prices can ultimately slow this business down leading to more inventory available. According to the National Association of Realtors, investors represented 19% of home sales in March and April as compared with 20% in April of 2012.

Rising mortgage rates may also have an affect on refinancing activity. Refinances have been a major player of mortgage activity over the past several years while rates were down and at historic levels. If rates begin to increase, homeowners will not be refinancing to higher interest rates, at least not for a few years until record low rates are forgotten. Even in the future, those with low rates will only be interested in refinancing if there is a need for debt consolidation or equity cash out for some other reason. Otherwise, this part of mortgage activity is going to be quiet.

The future of the housing industry continues to be questionable. Extremely low mortgage rates kept the industry going, however, this may have a negative impact on future activity. Lenders keeping credit tight had and continue to have their reasons. However, holding back consumers from purchasing homes may have prevented a stabilized housing recovery. Special mortgage programs have helped many people, but extending them for two years during what is supposed to be a recovery seems rather extensive. That is unless the current recovery is not stable and is expected to become another problem.

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