The mortgage market has begun the long and arduous process of crawling from the wreckage of the last two years. While the government has been involved in mortgage lending since the 1930s, recent recovery efforts have resulted in a massive intervention in the mortgage sector to both support the financial system and keep mortgage money flowing to the housing markets. However, the government's involvement in mortgage lending will be difficult to end without renewed disruptions to the financial and housing markets. Whether they know it or not, they are in for the long haul. With a long-term recovery in housing as the ultimate goal, they need to examine some of the distortions stemming from the government's traditional role in mortgage and MBS markets.

The Treasury Department and the Federal Reserve are actively working to push mortgage rates lower using a variety of tools, from "qualitative easing" (i.e., the Fed purchasing Treasury notes and bonds) to directly buying agency MBS. While their activities have succeeded in keeping conforming mortgage rates relatively low, the non-conforming mortgage market remains in a state of severe distress. The lack of a capital market outlet for mortgage loans ineligible for federally backed guarantees, combined with the risk aversion of many large lenders, has virtually paralyzed jumbo lending. (For example, JPMorgan Chase and Harris Bank now require a 70% LTV on jumbo-balance loans, irrespective of credit score.)

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