For all of the upheaval the housing finance system has sustained in the past 18 months, the mechanics of the mortgage market remain remarkably unchanged.
Fannie Mae and Freddie Mac continue to purchase and securitize loans, subprime borrowers continue to find financing and homeowners in default continue to walk away from their obligations at alarming rates.
The difference now is that the more perilous type of lending Fannie and Freddie used to do has been taken over by the Federal Housing Administration (FHA), and the private capital that got sucked out of the market for MBS has been replaced with a $1.25 trillion commitment from the Federal Reserve Board.
By transferring risk back to the national balance sheet, the government surely deflected a death blow to the system last year. But since then, the U.S. approach to housing finance has essentially been frozen in time. The question now is whether what follows will be a controlled thaw or a flood of old problems and new complications.
"We've temporarily nationalized housing finance to avoid the collapse of the housing market, and this is where I think we've kicked the can down the road," said John Ryan, executive vice president of the Conference of State Bank Supervisors, which includes in its membership many of the state agencies responsible for mortgage regulation. "There are questions we just haven't fundamentally answered."
For starters, it remains unclear where the bottom in home prices is, "and you just can't look at this crisis without coming back to that," Ryan said.
To gauge prices, one needs to be able to predict what will happen when interest rates, kept low by the Fed's responses to the crisis, begin their inevitable march upward.
Will housing market activity stay strong enough to support current prices? Will enough borrowers with variable-rate mortgages be able to sustain the hit? And regardless of where interest rates go, can homeowners with FHA mortgages or modified loans be counted on to stay current on their payments, or should the country be making crisis preparations for subprime 2.0?
Underlying all of this is a larger concern about how Washington will get control over a federal deficit that swelled to a record $1.4 trillion for the fiscal year that ended Sept. 30, representing about 10% of the U.S. economy.
Some of the tools the government is using to promote stability in the housing market give Robert Pozen, the chairman of MFS Investment Management and a senior lecturer at Harvard Business School, the uncomfortable feeling that important lessons from the crisis already are being ignored.
He is especially wary of the $8,000 tax credit for qualifying homebuyers, a piece of the 2009 economic stimulus package that was recently extended. In purchases involving a down payment and closing costs of $8,000 or less, Pozen argues, the credit amounts to a no-equity mortgage that would be too tempting to walk away from if the borrower gets into financial trouble. Loan modification programs, which so far have shown disconcerting rates of recidivism, also may be delaying a true day of reckoning.
"In order to keep the housing market from really, fully adjusting downward, we've built in a tremendous amount of problems that are going to occur," said Pozen, the author of Too Big to Save? How to Fix the U.S. Financial System, a book about the credit crisis.
But there are some reasons to be encouraged, particularly when it comes to the effectiveness with which the Fed has been able to carry out its influence in the mortgage market. The liquidity pumped in by the central bank not only helped to keep credit available, it held down rates, giving a much needed boost to housing market activity.
"Having them put their stick in the ground stopped the negative-feedback loop," said a source at a major trading desk in New York. Though the Fed eventually will need to unwind its position, "they're smart enough there to know that if they announce they have to sell a trillion and a half of mortgages, mortgage rates go up to 7%, and that's not going to help anybody."
Investors are predicting a more gradual exit. But there may be other sources of upward pressure on rates, including a proposal for reform that would require the firms feeding the securitization markets to eat some of their own cooking.
"If you go to the large originators and say, 'You guys now need to hold a 5% first-loss piece,' the economics change dramatically, the availability of mortgage credit goes down and mortgage rates go higher," the trading source said. "When [policymakers] start to hear that, they might change their tune."
And when all of that is sorted out, then maybe the government can turn its attention to a plan for springing Fannie and Freddie out of conservatorship.
When he announced their rescue in September 2008, then-Treasury Secretary Henry Paulson described the arrangement as a "time-out" for stabilizing the companies and deciding on their roles and structures.
Paulson didn't recommend how long the pause should last, but it may not make much sense to restart the clock anyway until other key pieces of the housing finance system fall into place.
"You've got to look first at the housing market and what we want it to look like, and then you look at how Fannie and Freddie fit into that," said James Lockhart, former director of the Federal Housing Finance Agency, Fannie and Freddie's regulator.
"Fannie and Freddie are doing their job and actually doing it well at the moment, so there hasn't been pressure to fix them because there are so many other things going on," said Lockhart, now the vice chairman of WL Ross & Co., the distressed-investment unit of Invesco. "It's on the back burner because it's not causing a problem. On the other hand, it has to be addressed."
As do a great many other issues raised by the crisis.