Right now, housing remains on government life support. Treasury-backed entities are guaranteeing about 85% of new mortgages, while the Fed buys 80% of the securities into which these taxpayer-backed mortgages are packaged.
The optimistic take is that this support, though large, will shrink when market forces regain confidence. But there is a darker possible outcome: The emergency assistance is entrenching a system in which the taxpayer takes the default risk on most mortgages, while a small number of large banks get a larger share of the fee revenue from originating and servicing mortgages.
Market forces cannot hope to exert themselves when the risk/reward calculation is so low. Interest rates compensate for risk but spreads between treasuries are at all time lows and overall rates are at all time lows. Banks would make market rate loans but with the Fed distorting the market with its purchases they've actually become net sellers of mortgages instead. The market is saying that rates need to rise in order for them to lend but the USG doesn't want to hear that answer.
Wells Fargo CEO is very direct:
Despite the bust, conforming mortgages that qualify for government backing remain mispriced. That can be seen in the fact that banks have no desire to keep the most common mortgage on their books. Wells's chief executive, John Stumpf, recently said: "We're not putting on 30-year [fixed-rate] mortgages at these rates."
This housing market "bottom" being sold right now is predicated on ultra-low rates. These ultra-low rates are only possible because of the massive QE purchases by the Fed. How much longer will the purchases go on? Not only have the purchases reduced the spread over the 10 year note to very low levels, they have lowered overall rates as demand for MBS has wained and the normal MBS purchase money has gone to purchase other notes (the supposition is it went into Treasuries to wait out the market which reduces mortgage rates further).
