5 housing issues to watch in the new year

From The Wall Street Journal:

The housing market, which brought the economy to its knees in 2008, struggled to recover in 2009. The modest gains of the past year can be credited in many ways to federal support that will be removed at some point in 2010. ... That makes for an uncertain outlook for the year ahead...

Here’s our list of five big issues to keep an eye on in 2010:

• Mortgage rates: The Federal Reserve has kept mortgage rates low for most of 2009.... Whether the private market is ready to fill the gap when the Fed exits is one of the hottest debates between economists, investors and analysts.
• Fannie, Freddie and the FHA: Nearly nine in 10 mortgages are now being backed by Fannie Mae and Freddie Mac, the mortgage-finance giants taken over by the government, or government agencies such as the Federal Housing Administration. The future of Fannie and Freddie remains nearly as uncertain now as it was one year ago.... The FHA, meanwhile, has suffered from heavy losses that could lead to a taxpayer bailout...
• Loan modifications: Loan modification efforts have helped to hold back the supply of foreclosures for sale. The number of seriously delinquent loans continues to climb, so it’s reasonable to expect a pick up this year in distressed sales and foreclosures that hit the market.
• More loan resets: Analysts and pundits have been warning for years about the coming wave of option adjustable-rate mortgages that will jump to sharply higher payments beginning this year. Those loan recasts are concentrated particularly in high-cost housing markets.... Meanwhile, more interest-only loans that allowed borrowers to avoid making principle payments for three, five, or seven years will reset to higher payments.
• Tax credit and home sales: Sales were fueled in the late summer and early fall in part due to an $8,000 tax credit that had been set to expire in November. Congress has extended that through the first half of next year, but some economists say that the tax credit will steal demand from future months.... There’s still a good deal of debate between housing economists and analysts over whether a “double-dip” could lead home prices to fall below the bottom that was set last April.

As long as mortgage rates remain at historic lows, option ARMs will be a non-issue. If mortgage rates rise toward the historic norm—an unlikely event in the near-term—only then will option ARMs become a problem.

As far as the FHA and GSEs are concerned, the government is continuing the reckless, low down-payment lending that got us into the current mess.