Why Is U.S. Government Still the Dominant Force in Mortgage Market?

 |  Includes: C, FMCC, FNMA, KME
by: Michael Panzner

According to many experts, the worst of the financial crisis is over. The Federal Reserve has ended a number of extraordinary credit programs and boosted its discount rate to normalize its lending facitlities. The Treasury has announced plans to fully dispose of its 7.7 billion shares of Citigroup, Inc. (NYSE:C) common stock over the course of 2010.

To top it all off, banks are making money hand-over-fist. So that must mean the financial system is back on track, right? Then why, as Bloomberg reports in "FHA Home-Financing Volume Sign of ‘Very Sick System,’" is our government still the dominant force in the U.S. mortgage market? [italics mine]

Loans guaranteed by the Federal Housing Administration, the U.S.-owned mortgage insurer, may be involved in more home-purchase transactions than borrowing financed by Fannie Mae (FNM) and Freddie Mac (FRE).

FHA lending last quarter may have topped the combined volume of government-supported Fannie Mae and Freddie Mac in a home-lending market that’s still a “government-financed market,” David Stevens, the agency’s head, said today at a conference in New York, citing research by consultant Potomac Partners.

“This is a market purely on life support, sustained by the federal government,” he said at the Mortgage Bankers Association conference. “Having FHA do this much volume is a sign of a very sick system.”