By most measures, the national housing market appears to have stabilized. If not for government intervention, however, it’s unlikely that this would be the case. Summarized Yale economist and housing market guru Robert Shiller:  “ ’The rebound in the housing market since April seems to be related to these efforts’ ” that include a homebuyer tax credit and Federal Reserve purchases of mortgage-backed securities designed to hold down borrowing costs.” This begs the question: when government support dries up, what will happen to housing prices?

Government intervention programs in the housing market are numerous. Mr. Shiller mentioned the first time homebuyer tax credit and the $1.25 Billion in Fed MBS purchases. Acronyms abound, with the HAMP modification program and the HREF refinancing program. There was TARP, which directed cash to struggling banks so that they might step up mortgage lending. There is an ongoing initiative aimed at encouraging principal reductions and deeds-in-lieu of foreclosure, where appropriate. There is the government conservatorship that still encases Fannie and Freddie. There is the FHA, which now now insures more than 1/3 of new mortgages. There are the discretionary funds awarded to states to fund experimental relief efforts. And of course there is the mortgage interest tax deduction, which was in place well before the housing crisis, but is worth pointing out nonetheless.

There are a few key threats to all of these programs. The first is one of financing: they are expensive to operate, and it’s unlikely that they will pay for themselves, despite the government’s insistence. The second issue is efficacy. The modification program, for example, has helped only a handful of eligible borrowers, and hurt many more by simply delaying foreclosure. Meanwhile, new evidence suggests that the interest tax deduction does nothing to spur home ownership. Finally, there is the issue of whether these programs are even producing outcomes which are desirable. “I don’t see anything being gained by holding housing prices higher than the market rate. It is difficult to see why the government would want to pursue policies that would encourage people to pay too much for homes,” Dean Baker recently told reporters. In short, it looks like time is running out.

The Fed has essentially stopped purchasing MBS, although it is currently debating whether to resume doing so. The homebuyers tax credit was renewed once, but is unlikely to be renewed again when it expires in May. The modification program is still alive, though generally acknowledged as a failure, and it could be completely closed soon. High default rates already threaten the solvency of the FHA, and despite premium increases, it may have no choice but to cut back on lending. Fannie and Freddie are safe until 2011 (according to Treasury Secretary Tim Geithner) although Congress has already indicated that they will be abolished. As for the mortgage interest tax deduction, the housing crisis revealed how counter-productive it was, and it could be one of the first things to go when the federal government gets serious about fiscal responsibility

So there you have it. The government clearly wants you to buy a house now! It will subsidize the purchase, facilitate the financing process, keep borrowing costs reasonable, and help you make payments if you get into trouble. Why wait, right? On the other hand, when the government pulls the plug, the bottom could fall out of the housing market. In which case, that FHA loan and $8.000 tax credit might start to look like a booby prize.

With interest rates at record rthlows and FHA mortgages in vogue, this question has never been more pertinent. Simply, assumability is a clause in a mortgage that allows it to be transferred from one borrower to another. In other words, when the original borrower sells the home, he can transfer the mortgage to a new borrower instead of repaying the mortgage.

You’re probably wondering, Why would anyone want to do that? That’s a fair question, since the new borrower will still have to past muster, and the lender won’t sanction the loan assumption unless the new borrower’s credit score is comparable to that of the original borrower. Still, there are two key benefits. The first is that the new borrower can save on closing costs (though there are a handful of small fees) by not having to obtain a new mortgage. More importantly, the new borrower is subject to the original mortgage rate, a lucrative perk if interest rates have risen over the interim. In return for this benefit, mortgages with assumability clauses typically carry slightly higher initial interest rates or require private mortgage insurance.

It is important to understand the three types of assumability, since they are not created equal. An assignmentof a mortgage transfers the obligation to repay, but the original borrower is still on the hook if the new borrower defaults. With a subject-toassumption is similar to an assignment, the original borrower is also responsible for any deficiency judgements (i.e. second mortgages) in the event of default. A novation transfer absolves the original borrower of all responsibility even if the new borrower defaults. Unlike an assignment and subject-to transfer, a novation is the only kind of assumption that doesn’t carry risks for the original borrower.

Generally, assumability clauses are only present in FHA and VA loans. It doesn’t hurt to ask your lender if it can be inserted into your loan, but in practice, most lenders would be reluctant to do so. Still, it’s worth understanding the trade-off with assumability. As long as interest rates have risen (enough to offset the PMI premiums) when you sell your home, then assumability will inure to you as a net benefit. Over time, however, the value of assumability decreases, as home-price appreciation and a decline in your mortgage balance make it unlikely that a new borrower will be able to afford to assume your loan. Ultimately, if your loan is assumed, the benefits will be shared between you and the original borrower.

Without introducing precise numbers, suffice it to say that the sweet spot for assumability is probably between 3 and 7 years. As one expertsummarized, “Short of three years, it is not clear that interest rates will be significantly higher than they are today, and after seven years, it is not clear that assumability will have significant value to home buyers.”

On April 5, the federal government’s latest effort to address the mortgage crisis kicks off. Known as Home Affordable Foreclosure Alternatives (HAFA), it basically stipulates that lenders have two main options for dealing with bad loans. Either they offer the customer a loan modification, or they agree to a short sale / deed-in-lieu of foreclosure. While lenders are crafty and will certainly find a way around the requirement, it’s important that borrowers understand their rights.

So what is a Deed-in-Lieu of Foreclosure? For borrowers who are behind on their mortgages, it represents an opportunity to avoid outright foreclosure. Basically, a borrower signs over the title (the “Deed”) to his home to his lender, and in return is supposed to receive a cancellation of his debt. For those borrowers with underwater mortgages (the mortgage balance exceeds the market price of the associated property), this is an incredible benefit, since it essentially allows them to walk away from their mortgages and leave the bank with the balance. However, it is also beneficial for delinquent borrowers whose mortgages are not underwater, since the deed will probably result in a higher sale price (and more leftover equity for the borrower after repaying the bank) than if the property had slipped into foreclosure.

You’re probably wondering: If this is the case, why would any sane lender make such an agreement? The answer is that foreclosure is costly, complicated, and just plain annoying. It can take six months (and even longer) for a foreclosure to be completed, from initiating proceedings to evict a delinquent borrower and sale of the property. During that time, the lender receives nothing from the borrower, and must in effect, pay property taxes and utilities itself. In addition, many spiteful borrowers will deliberately fail to maintain the property or even vandalize it, while waiting to be evicted.

In short, lenders have come to the conclusion that a Deed-in-Lieu will actually save them money, especially if a foreclosure is imminent. In fact, this realization is behind a new Citigroup program which provides for the borrower to live in the home for six months free-of-charge, and then offers them $1,000 in “relocation assistance” as long as the property is in move-in condition. Wells Fargo has a similar policy. Anyone with a Fannie Mae loan, meanwhile, has the right to remain in the home for up to one year following a deed-in-lieu agreement, and must pay market-rate rent (which is presumably lower than their mortgage payments were).

There are a few downsides to signing a Deed-inLieu. As with a foreclosure, your credit will be severely impacted, and you won’t be able to obtain a mortgage for at least a couple years. In addition, a handful of states have laws which allow lenders to go after borrowers for the remaining balance when an underwater mortgage is involved. Thanks to recent legislation, however, there are no longer significant tax consequences associated with the cancellation of a (underwater) mortgage, but as with any aspect of the tax code, certain conditions must be met.

Since a Deed-in-Lieu agreement must be entered into voluntarily, most lenders will not initiate one for fear that it makes it look like they are pressing to take control of a property. Thus, if you think you are eligible for, and would benefit from a Deed-in-Lieu, you should speak to your lender, and make it clear that you are doing so voluntarily. You can also cite HAFA if you think it would help.

Generally, the news media focuses on one number when reporting on mortgage rates: the Freddie Mac PMMS national 30-year fixed rate (which this week, happened to be 4.97%). This number is far from the whole story, however, and there are a handful of rates for other products and specific regions that I wish to expand upon below.

The first distinction is between 30-year and 15-year mortgages, which is significant both in form and in pricing. The average rate for a 15-year fixed is 4.33%, which is an incredible .64% higher than the equivalent 30-year rate. 15-year mortgages carry additional savings, since interest is accrued over a shorter time period. These savings are not insignificant and could easily total $100,000 or more over the life of a modestly-sized mortgage. On the other hand, the monthly payment associated with a 15-year mortgage will be higher, which means that your income ratio will also be higher, and the maximum size loan that you can obtain will be smaller.

The next distinction is between variable and fixed rate loans. Again, the disparity is not insignificant. While the full gamut of variable-rate mortgage products spans dozens, or even hundreds of different types, there are two that Freddie Mac monitors: Five/One-year variable rate and one-year variable rate. The 5/1 variable rate is actually a hybrid loan, and involves paying a fixed-rate for the first five years and a variable rate thereafter. The national average 5/1 variable rate is 4.11%, with an average margin of 2.75%, which is added on to a benchmark shot-term rate to determine the variable rate.

The average one-year adjustable rate mortgage rate is 4.27%, which is what you would pay not only for a variable-rate mortgage, but also what you could expect to pay after five years of having a 5/1 variable rate mortgage. In practice, many borrowers will refinance the mortgage within five years to avoid the uncertainty associated with variable rates. That’s because while short-term rates are currently low, they are projected to rise within the next 1-2 years, which would cause variable rates to rise proportionately. There is an inherent risk in any kind of variable rate mortgage, which is that you won’t be able to refinance if/when variable rates rise. The other risk is that fixed-rates could rise even faster, in which case it would have been more economical if you had taken out a fixed-rate mortgage in the first place. Of course, if variable rates remain low, then you may come out ahead. It is a gamble, and the decision depends largely on your comfort with risk/uncertainty.

The final distinction is regional, since mortgage rates vary across the country, sometimes by as much as .5%. Chances are, however, that this factor is beyond your control, as very few people would deliberately purchase a home in another part of the country merely because mortgage rates are lower! Besides, since mortgage rates are all derived from the prices for mortgage-backed securities – a national securities market – differences in rates are often offset by differences in points, so that the APR is ultimately the same.

Predicting mortgage rates going forward actually involves two separate predictions. Fixed rates are generally coordinated with long-term interest rates, and typically trade at a spread to Treasury Bond rates. Over the past 12 months, the Federal Reserve Bank has deliberately engineered a decline in fixed rates, through the purchase of $1.25 Trillion in mortgage-backed securities. These purchases, however, are slated to come to an end in April, at which point fixed rates could begin rising gradually, ending the year closer to 6%. If the Fed renews its purchases as some analysts expect, this would keep rates low, around the current 5% level. The Fed also has a role in determining variable rates, which are determined indirectly from the Federal Funds Rate. The Fed Funds rate has been set at .25% – a record low – for more than a year, and there is no consensus as to when the Fed will lift it. Futures prices indicate that a .25-5% hike before the end of 2010, but that is more of a guess at this point.

For the time being, then, both fixed and variable rates will probably remain low, though both could rise without warning at any time. Keep this in mind if you are considering a home purchase that would require a mortgage.

As the housing crisis mellows and government aid continues to flow into the mortgage sector, there is a consensus that Jumbo mortgages are benefiting. These mortgages were among the hardest hit at the inception of the downturn, as lenders moved to curtail risky lending practices, and there was a strong hesitancy to approve anything other than plain vanilla loans for conforming mortgages. While standards applying to Jumbo loans are being eased, however, rates remain high.

As suggested by the name, a Jumbo mortgage is generally a loan that exceeds the principal limits set forth by Fannie Mae and Freddie Mac, whose standards continue to dictate mortgage lending nationwide. The precise limit depends on the location – in order to account for regional differences in the housing market – but ranges from $417,000 to $729,750. Anything less than the Fannie limit is known as a conforming mortgage and anything greater is treated as a Jumbo. Some lenders have even created an overlapping category for mortgages that just exceed the limit known as conforming Jumbo.

Without delving too deeply into the history, suffice it to say that during the housing boom, obtaining a Jumbo mortgage wasn’t much more difficult than obtaining a conforming mortgage, which is to say that they weren’t hard to get. Interest rates were often slightly higher (.3% on average) than conforming loans, and standards were about the same. Of course, you needed to earn more income and/or have more assets, but the ratios that lenders used to determine one’s maximum’s loan size were about the same.

Fast forward to today, where lenders require a 20-25% down-payment for a Jumbo loan. And that is only in a stable housing market! If you need to mortgage a home in a “troubled” region, you can expect to put down even more. It’s not enough to have a documented high income and a stellar credit rating; you need to show that you have enough money in the bank to cushion against job loss and other financial hardship. As for rates, the spread between conforming and Jumbo loans is now 1.55% on average; whereas mortgage rates for conforming loans are now at record lows, jumbo rates are higher than they were during the boom. Basically, delinquency is plaguing jumbo mortgages that were issued during the mortgage boom, and lenders can’t afford the possibility of fresh loans defaulting a few years from now.

Of course, there are ways to get around this lender reluctance. One is to simply put down more money. Some experts testify that making a down-payment of as little as 40% can still result in a waiving of various documentation requirements. For those of you that can’t afford to make a higher down-payment out of pocket, you can consider dipping into your retirement account and/or obtaining a second mortgage that would cover the down payment. Otherwise, you may get stuck waiting for prices to fall further, to the extent that your jumbo loan would be reclassified as conforming, or would at least decline to the point of becoming affordable.

Given that many Jumbo borrowers are in the same boat, a further decline in prices for high-end homes might become self-fulfilling, and you might not have to wait long.

A new Congressional proposal would eliminate one of the distinguishing features of a (US) mortgage: the mortgage interest tax deduction. Critics of the deduction have long argued that it deprives the federal government of much-need revenue, that it contributes to home-price inflation, and that it doesn’t do much to spur home ownership. As a result, the consensus is that an alternative system needs to be legislated into existence, and it must be equitable, effective, and efficient.

Towards those ends, the Wyden-Gregg bill, which is currently working its way through the system, would either completely do away with, or scale back the deduction that many homeowners currently claim when filing their taxes. One proposal would impose a maximum income constraint of $250,000 on would-be filers, in order to address the concern that the deduction primarily benefits the wealthy. Another proposal would replace the annual tax deduction with a one-time homebuyer tax credit, amounting to perhaps $10K. Rest assured, however, since the bill doesn’t have much support – given current economic conditions – and it seems unlikely that the deduction will be phased out any time soon.

For the time being, then, you can still deduct interest on the first $1 million of mortgage debt, as well as all of your property taxes, for up to separate residences. (That’s $1 million all together, not each). In addition, you can also deduct interest costs on up to $100,000 for a home equity line of credit. For now, you can also deduct private mortgage insurance (PMI), but only if you bought your house  in 2007 or later. Property taxes – but not homeowners insurance – are also deductible. As with any aspect of the tax code, the mortgage interest tax deduction is much more complicated than you think, and there are a handful of conditions that must be met before you can claim it. The most important one is that you itemize when filing your taxes. For more information, refer to the IRS website, and review the flowchart below.

If you are in the process of buying a home (and obtaining a mortgage), you can use our Real Estate Tax Benefits Calculator to estimate the savings associated with deducting your mortgage interest. Basically, the calculator will multiply your marginal tax rate by your estimated annual mortgage interest (as well as PMI and property taxes) to determine how much you will save as a result of the deduction. Given the uncertainty surrounding this perk, however, you would be wise to treat the savings as a gift, and not try to apply all of it towards a more expensive mortgage.

Having essentially conceded the failure of its cornerstone load modification program to achieve widespread mortgage relief, the Obama administration is changing tack. Its new strategy is to focus its attention on specific regional markets, rather than to address the entire national market with one program.

Specifically, the new initiative will allocate $1.5 Billion to the handful of states that have witnessed 20%+ declines in housing prices: California, Florida, Nevada, Arizona, and Michigan. “There will be a formula for allocating funding among eligible states that will be based on home price declines and unemployment.  Eligible [Housing Finance Agencies] HFAs that would like to participate must submit a program design to Treasury.  Program designs must meet funding requirements under the Emergency Economic Stabilization Act of 2008 (EESA).” It seems then that the responsibility to develop specific solutions will rest ultimately not with the federal government, but with the organizations that receive the funds.

This initiative is a recognition that the housing crisis is composed of a number of local crises, rather than one cohesive nationwide crisis. There are disparities in housing prices, sales, delinquencies, even interest rates, that exist between states, sometimes even between counties. For example, the delinquency rate in Florida is much higher than in California, even though prices have fallen about the same in both states. Thus, it makes the most sense that unique relief programs be developed for each state, or even each locality.

A number of ideas have already been mooted, including “measures for unemployed homeowners, programs to assist borrowers owing more than their home is now worth, programs that help address challenges arising from second mortgages; or other programs encouraging sustainable and affordable homeownership.” In fact, unemployment, underwater borrowers, and second mortgages have all served as obstacles to national relief efforts, and it is important that now they can and will be taken into account when designing programs.

For example, unemployment has made it difficult for many borrowers with temporary loan modifications to obtain permanent modifications, since they couldn’t even make payments during the trial stage. As a result, the state of Pennsylvania developed a program that will lend $60,000 to unemployed homeowners for up to three years, to be used to pay their mortgage as they look for work. It’s unlikely that California could afford such a plan ["Pennsylvania's (plan) is great but we probably have more unemployed people in San Diego County than they have in Pennsylvania."], but it could work in a state like Michigan.

In addition, underwater borrowers have found it difficult to achieve either loan modification or refinancing.  “About one-third of California mortgage borrowers owe more than their home’s value. Californians in foreclosure owe an average of $140,000 more than their home’s value…But banks have fiercely resisted efforts to get them to reduce the principal owed on those underwater homes.” Finally, borrowers with second mortgages have found it difficult to convince one lender – let alone two! – that they deserve a modification. State plans could overcome these obstacles by rolling both mortgages together in the case of the latter, and work with lenders to reduce principal in the case of the former. Due to the local nature of this program, the precise terms would depend on local circumstances.

Across the blogosphere, pundits and financial advisers are baffled by the failure of borrowers to take advantage of unprecedented low rates and refinance their mortgages: “There are quite a few mortgages that are in the money, meaning they are well within the zone where refinancing makes sense. Given where rates are right now, refinance activity should be quite a bit higher than it is.”  Low rates, goes the logic, won’t last forever, and eligible borrowers would be wise not to delay in refinancing their mortgages.

According to a recent report in the Washington Post, however, the fall-off in refinancing applications has little to do with borrower sloth, and everything to do with lender standards and housing market conditions. It’s not as if borrowers are sitting at home biding their time in the hopes that rates will fall still further. On the contrary, a steady faction has continued to seek out refinancing, but a greater proportion is being rejected. According to one lender, the rejection rate has risen from 5% to 25%. The main reason for this trend: the decline in housing prices.

On the surface, one wouldn’t necessarily expect the housing market to significantly affect mortgage refinancings. After all, the two are hardly related, right? Demand for refinancing is a primarily a function of interest rates, and shouldn’t depend on housing prices. However, the recent downturn in prices was so severe that many borrowers no longer meet the basic 20% minimum home equity threshold stipulated by lenders. Anyone who bought in the last five years with a minimal down-payment is probably nowhere near 20%, and may in fact be below 0%. So-called underwater borrowers have no chance of being approved for a conventional refinancing, even with a perfect credit score.

For such borrowers, the only alternative is to buy private mortgage insurance (PMI), and/or rollover a previous PMI to a new (refinanced) mortgage. Why isn’t everyone rushing out to do this? The answer is that it’s prohibitively expensive, requiring both a hefty upfront premium as well as annual payments. Given the uncertainty over housing prices, PMI premiums are rising, and borrowers are balking at committing to paying a premium indefinitely (since there’s no guarantee that one’s equity will return to 20% – at which point insurance is no longer required). The bottom line is that when PMI is factored in, refinancing no longer makes financial sense for anyone whose current mortgage rate is below 6%.

It’s ironic that now that many borrowers legitimately need a refinancing (as a result of the economic recession), they are unable to get one. The federal Making Home Affordable Refinancing Plan was unveiled to address this issue, but it lacks traction; to date, only 200,000 borrowers have been approved through the program, much less than the 5 million borrowers that were initially projected. The program is slated to expire in June.

Don’t let this pessimistic report discourage you. If your current interest rate exceeds 6%, you should still think about applying. [You can use our Refinancing Calculator to estimate savings]. Just maintain realistic expectations, and keep all of your options open.

As the name of our website implies (and as the #1 Google ranking confirms), we are THE online source of mortgage calculators. Unfortunately, there isn’t enough space in this post to explore all 22 of our mortgage calculator tools, so I’ll focus on one in particular: Home Affordability Calculator.

The purpose of this calculator is to help you figure out the maximum that you can borrow, under a given set of loan parameters. Many borrowers begin the process by trying to find the home of their dreams, and then worrying about if/how they will afford to repay the mortgage associated with it. A better (or at least more conservative) approach, would be to begin by using the Home Affordability Calculator to determine a reasonable borrowing amount, and then go out and look for a home.

The first input in the calculator is your estimated down-payment. If you already have an idea as to a down-payment (which will come from your savings, and not from the loan), you can key it in here. For those of you just beginning the process, you probably won’t have a strong idea of what kind of down-payment will be expected of you. For a conventional mortgage, 20-25% is the standard, while FHA loans typically require only 3.5-5%.

Next, estimate your interest rate. Again, for those just starting out, this will probably be impossible, especially if you aren’t even aware of prevailing market rates. You can find information on regional interest rate levels from the weekly Freddie Mac Primary Mortgage Market Survey. Given that interest rates fluctuate over time and that you may have to pay a higher rate if your credit isn’t perfect, it’s a good idea to be conservative when estimating your rate, perhaps by adding .5% onto an “average” rate [Note: it is assumed that points, which are used to "buy down" the interest rate will come out of your pocket, and hence are not included in the calculation. The same is true for closing costs. Some loans allow you to finance your points, but that is beyond the scope of this calculator].

Length refers to the duration of your mortgage. 30 years is standard, although 15 years is also an option. Estimated front ratio refers to the percentage of your gross (after-tax) income that your PITI (mortgage principal, interest, taxes, and insurance) will represent. The estimated back ratio refers to the percentage of gross income that all of your debt (mortgage, auto loans, credit cards, etc.) represents. Unless you have reason to believe otherwise, you can assume a 28/36 (front/back) ratio, which means that your PITI cannot exceed 28% of your gross income, and all debt (including PITI) cannot exceed 36% of income.

The next step is to enter all of your gross (after-tax) income into the income fields. You should include the income for all parties who will be listed on the loan documentation. The same goes for the debt fields. [Note that you cannot exclude the debt of one of the parties without also excluding his/her income]. This data will be used in conjunction with the ratios to determine how much you are ultimately eligible to borrow, so it’s important to be accurate and truthful.

Then, enter in estimated property taxes (usually expressed as a percentage), as well as homeowner’s insurance, and private mortgage insurance (PMI) which is paid both upfront and annually by high risk-borrowers (i.e. those whose down-payments are less than 20%) to mitigate against the risk of default. If your projected down-payment exceeds 20%, you can leave this field blank.

Finally, click the calculate button, and you will be provided with the maximum that you will be allowed to borrow under the parameters you entered. You can play around with the loan parameters (i.e. increase the down-payment size, change the loan term) and watch the results change accordingly.

It is important to remember that this represents an estimate only. When it actually comes time to obtain your loan, most of the inputs will probably be different from what you originally assumed, so it’s important to be conservative. Last, this formula is designed to show how much you are eligible (the maximum that the bank will lend you) to borrow, and not necessarily what you can afford to borrow. If the housing bust has taught us anything, it is that the gap between these two figures is often larger than most borrowers initially estimated. Plan accordingly, and be conservative!

Prior to the bursting of the housing bubble, the majority of borrowers probably had never heard the term mortgage-backed security (MBS) before, and the handful that had probably had only a vague sense of the vital function that they play(ed) in the mortgage finance system. Nowadays, most borrowers have at least a rudimentary understanding of MBS, thanks to the role that they played in the credit crisis. This role is evolving rapidly, however, and borrowers would be wise to stay abreast of these changes.

For those of you aren’t entirely clear, a mortgaged-backed security is simply a large portfolio of mortgages, bundled together for risk-management purposes, and sold to institutional investors. In theory, it’s a system that is designed to benefit everyone. Lenders are able to originate news loans freely without having to worry about holding them all on their balance sheets. Investors are happy because the MBS are structured such that a handful of individual defaults has minimal impact on the value of the whole portfolio. Borrowers, meanwhile, benefit in the form of lower interest rates.

In spite of the credit crisis, everyone is fighting to make sure that this system – or some semblance of it – remains in place. Currently, it is largely because of the interventions of the Fed and the government takeover of Fannie & Freddie that the market for MBS is even functioning. “More than 90 percent of home loans at the moment have some form of government backing, compared with about 30 percent at the peak of the housing boom.” In addition, the Fed’s $1.25 Trillion in purchases of MBS are keeping interest rates low, by “acting as a sponge, absorbing about $12 billion a week of what you might consider excess supply.” When either the government guarantees and/or the Fed’s purchases come to an end, surely the system will suffer a giant hiccup. The consensus is that when the Fed stops buying, rates could rise by as much as 1-2%, which could translate into more than $100,000 over the life of a typical mortgage. The Fed has attempted to allay these concerns by mulling an extension of the deadline of its asset purchase program for a second time (the original deadline was January 1, and the current deadline is March 31), but regardless, the end is near.

What will the new system look like? In form, not so much different from the current one. Namely, standards will be a lot tighter, That means higher credit score requirements, bigger down-payments, stricter documentation requirements, etc. From the standpoint of investors – who ultimately bankroll the mortgages – this means higher quality mortgages and greater transparency. As one such investor expressed, “I really want to know what the hell I’m buying.”

The government might also step in and beef up regulations. Lenders, might be required to begin holding a (larger) portion of mortgages that they originate on their balance sheets. “With some skin in the game, the theory goes, they would be more careful to ensure borrowers are screened properly. Another idea is for regulators to set a basic, industrywide level lending standard for things like down payments and borrowers’ debt levels.”

From the standpoint of borrowers, this translates into higher interest rates for prime borrowers, and even higher interest rates for everyone else.