Uncle Sam's Not-So-Graceful Exit from Real Estate

Ben Bernanke and company meet today to further advance the process of winding down various financial rescue packages. The Feds should be cheered that the Treasury quietly closed its guarantee program for money funds last week and the world did not end. That is, unless Armageddon has just been postponed to November 30.

Getting Uncle Sam out of the real estate business is the first real test in what is likely to be a long, delicate process of disentangling the government from the financial rescue. The Fed is expected to announce a plan tomorrow to end its purchases of mortgage-backed securities and Fannie Mae and Freddie Mac debt. It has already bought $862 billion (out of an allocated $1.25 trillion) of the former and $125 billion (of a permitted $200 billion) of the latter, according to Bloomberg. All that buying has helped keep mortgage rates lower than they would have been otherwise.

But what happens when the Fed stops? By some estimates, mortgage rates could jump by as much as a full percentage point, which is just what the slowly recovering housing market doesn't need. To minimize the mortgage market's cash withdrawal symptoms, Bernanke and company are likely to taper off purchases through the first few months of 2010 rather than ending them all at once at the end of the year. Still, the process makes real estate markets nervous.

To make the industry even more anxious, November 30 is approaching, which is when the $8,000 tax credit for first time home buyers is set to expire. The credit has helped make first-time buyers just about the only shoppers in the market, and lobbyists from the National Association of Home Builders, the National Association of Realtors and others are storming Congress to keep the credit alive, if not increase it to $15,000. The NAR, for example, has helpfully created a You Tube campaign to persuade their representatives not to end the support.

All this suggests how the exit strategy is likely to play out in the months or years to come. The Fed and the Treasury have to take the training wheels off the wobbly financial system without tipping it back into chaos. But at least the Fed and the Treasury operate out of the voters' view much of the time, which makes it possible to engineer quiet escapes like that from the money fund program.

Congress, on the other hand, can't turn off the spigot without upsetting some interest group or other, and its record on extricating itself on schedule from rescue programs is not good. (See Clunkers, Cash for.) Not surprisingly, it's proving hard to get the horse's snout out of the feedbag once it's been attached. Unless you like federal deficits, this could be hard to watch.

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