Watch our videos for economic research updates further down the post.

In the midst of the mortgage meltdown it was hard to keep track of everything the federal government was doing to keep the credit freeze from sinking the economy. There was the massive bank rescue, with the idea that an equity infusion from taxpayers would shore up banks so they could start financing mortgages again; there was the temporary increase in loan limits in high-cost areas for loans backed by Fannie Mae, Freddie Mac, and FHA; and there was the first-time home buyer tax credit, now expanded to include move-up buyers.

But one federal effort that never received quite the same attention as the others, probably because it doesn’t lend itself to a term that rolls off the tongue like “tax credit” or “bank bailout,” is the Federal Reserve’s massive intervention in the mortgage-backed securities market.

Memories can be fuzzy, but roughly 18 months ago the concern was that mortgage interest rates would have to rise considerably to attract investors to Fannie and Freddie securities because their usual customers, including investors outside the U.S., no longer wanted to hold anything backed by mortgages. With no investors there could be no market liquidity until rates rose high enough to draw in money.

Enter the Federal Reserve, with a commitment to spend up to $1.25 trillion to buy the securities.

Well, that purchase commitment is set to expire at the end of March (although the Fed could decide to extend the program), and the question on analysts’ minds is whether mortgage rates will have to rise to attract investors to fill the gap left by the pull-out.

I would say the closest thing to a consensus is that rates will in fact rise but not dramatically, and not by enough to stop sales, at least by themselves. Here’s why analysts think this.

First, there’s no money to be made investing in cash. In the midst of the meltdown, investors were essentially paying the government to take their money. We’re no longer in that situation, of course, but there remains little yield in Treasurys.

Second, the return on corporate bonds, which come with no public backing, are at the point where they’re no longer that attractive. Right now “A”-rated corporate bonds are yielding spreads of about 160 percentage points over Treasurys, according to analysts.

Enter mortgage-backed securities, which come with public backing, and right now they’re yielding spreads of about 140 percentage points over Treasurys. Some analysts say the spreads would only have to rise a bit to attract money because of the safety offered by the government. As investors come into the market, spreads would narrow, keeping rates from rising too high.

That’s the thinking, at any rate, and it’s not too far from what NAR Chief Economist Lawrence Yun has been saying for a couple of months now. At his press conference earlier this week to release end-of-year 2009 and December monthly existing-home sales figures, he said mortgage rates might rise after the Fed pull-out by 70 basis points.

That’s not an insignificant amount, to be sure, but with rates today still at historically low levels, a 70-basis-point rise by itself would be unlikely to stall sales. (See 44-second video clip of Yun’s comment.)

What’s more important by far is the jobs picture, he says. If we keep shedding jobs, or even simply not adding jobs, then even continued Fed support of mortgage securities would do little to keep home sales on a growth path. (See 30-second video clip of Yun’s comment.)

For that reason, analysts who are wondering about the health of home sales in the months ahead might be looking at the wrong thing if they’re looking at the Fed pull-out. To get a sense of what the future holds, their attention should really be turned to the issue of jobs.

Full coverage of existing-home sales news conference:

Yun kicked off his presentation by telling the capacity crowd that things are looking up with the recent extension and expansion of the home buyer tax credit and home prices beginning to stabilize. While the U.S. economy still faces some significant challenges, including high unemployment, Yun says there are a number of reasons for REALTORS® to feel optimistic about 2010: “The momentum is building. . .”

According to Yun, the tax credit has already delivered a significant boost to the economy, bringing 350,000 to 400,000 buyers to the housing market so far. The extended and expanded home buyer tax credit will help to release pent-up demand, bringing more buyers–including move-up buyers–into the market and increasing market velocity. Yun estimates that in 2010, thanks to the credit and home price stabilization, home sales should increase by 15%–an estimate that he was careful to explain is extremely conservative. Home values, which Yun stressed are key to durable economic recovery, will begin to become positive in 2010.

To check out NAR’s Economic Forecast or the slide show presentation, visit NAR Research’s home page.

NAR Chief Economist Lawrence Yun says lenders are slowly getting back into the game because the climate of dread is lifting: Wall Street analysts and business executives have recalibrated their performance scenarios to reflect the greatly improved conditions among lower-priced homes (thanks to the home buyer tax credit and steeply discounted pricing). That in turn is creating a virtuous cycle as the improved scenarios help relax concerns over the economy, pushing up equities, which in turn creates the wealth that further increases confidence.

In other words, the improving lower-end housing market and the rising stock market are helping to push big financial services companies back into the business of loaning money rather than hoarding cash. As a result, it’s not just safe agency loans that lenders are willing to make (Fannie, Freddie and FHA) but also non-conforming jumbo loans. That helps further the narrowing of the interest rate spread between comforming and non-conforming loans.

I spoke with Las Vegas luxury home sales specialist Kenneth Lowman yesterday and he says the jumbo market has a long way to go before it’s back to where it needs to be, but, importantly, big loans are being made again. Earlier this year, that wasn’t so clear-cut.

“We recenty did a jumbo loan in record time,” he says. It was for a home listed at a couple of million dollars—obviously not an everyday deal for most salespeople—but it closed in just 22 days. Six months ago, he says, that never would have happened.

Yun predicts that financing for jumbo loans, second homes, and commercial real estate will show marked improvement by the middle of 2010. By late 2011 or early 2012, we might even see more non-agency, private-label loans securitized by Wall Street.

Yet the mortgage market by then will surely be different than it was during the housing boom, and in a good way. Buyers will be far more careful about staying within budget and lenders will be far more cautious about making loans to buyers who aren’t staying within budget.

Yet there remains a big concern: inflation. Although prices remain stable because of continuing slack in the economy (high unemployment, excess business capacity), once the enconomy starts growing again federal budget deficits will create inflationary pressure. The main way to head that off, says Yun, is for the government to produce a credible plan for getting the deficit under control.

Hear some more from Yun in an audio podcast he recorded earlier this week, mainly to talk about the need for Congress to extend the tax credit, and in his latest video interview, below, in which he talks about home-sale trends.

In July 2008, in the heat of the presidential election, McCain campaign advisor and former U.S. Senator Phil Gramm caused some controversy when he seemingly characterized the United States as “a nation of whiners” who were plagued by a “mental recession.” In other words, the economic problems of the time were all in people’s minds.

Events since then would appear to controvert Gramm’s argument. The economic troubles manifesting themselves at the time—including considerable overleveraging among major banks, increasing unemployment, and rising mortgage defaults—were not just figments of our collective imaginations.

However, in spite of his flawed analysis, Gramm may have been on to something with his concept of a mental recession. In fact, we may be heading into one right now.

According to Fed Chair Ben Bernanke’s remarks in a recent speech at the Brookings Institution in Washington, D.C., the recession is “very likely over.” That’s the good news. The bad news is that hardly anyone will be able to tell the difference.

Bernanke predicts that U.S. gross domestic product will rise moderately in the coming months, which would signal an end of the recession from a “technical perspective.” However, he also said the economy would continue to seem soft, particularly where the job market is concerned. In fact, the unemployment rate may still pass the previous post-World War II high of 10.8 percent before it starts to move decisively down toward 5 percent.

In real estate, we’ve certainly seen some positive developments during the past few months, such as rising home prices and an unprecedented streak in pending-home-sales growth. But as homes become more of a financial burden for their owners, a new wave of rate resets looms, and the commercial market continues to flounder, a palpable and justified sense of unease remains.

All of this is to say that a recessionary state of mind among consumers could linger well into a recovery that’s already tenuous for many reasons. At root, any mental recession is driven by insecurity about personal finances. Until most people in this country feel like they have good job security, manageable expenses and debt, and safe and stable assets, they will not believe in any recovery, regardless of what research reports and talking heads might say to the contrary.

Stacey Moncrieff

If you agree that the country hasn’t yet learned its lesson from the financial meltdown of 2008, you’ll want to take a look at a piece in Sunday’s New York Times by Sandy B. Lewis and William D. Cohan.

“The Economy Is Still at the Brink” alternately takes to task President Barack Obama and Congress (stop with the short-term fixes, and start imposing some real reforms on the banking system), U.S. consumers (stop spending money you don’t have), the securities industry (let’s have some real transparency in the area of asset-backed securities), and Wall Street executives (when are they going to publicly admit their role in the financial crisis?).

Lewis and Cohan call for something along the lines of South Africa’s Truth and Reconciliation Commission for top bankers. One condition for repayment of TARP funds, they suggest, should be that bank executives give a public deposition, explaining under oath what happened and why. In exchange for their honest testimony, they’d be granted immunity from prosecution. Interesting idea.

Cohan is both a former Wall Street executive and an investigative journalist. His book on the crisis, House of Cards: A Tale of Hubris and Wretched Excess on Wall Street (Doubleday, 2009), is supposed to be gripping. I’ll be following his advice to stop spending money I don’t have–I plan to pick up his book at the library one day soon.

One of the interesting things about this economic downturn has been the debate among serious thinkers about what letter of the alphabet it would most resemble when mapped on a chart. For those of you who haven’t been keeping track, here are the four current challengers:

• The V-Shaped Recession: The best possible scenario right now, the “V” recession would be characterized by a short economic bottoming out, followed by a sharp upturn.
• The U-Shaped Recession: This would be tougher, but still manageable. The difference between “U” and “V” recoveries is that the former has a longer period of economic stagnation and a slower recovery.
• The W-Shaped Recession: In this scenario, businesses and consumers are tantalized with a budding resurgence, but the economy collapses again before it truly improves for the long term.
• The L-Shaped Recession: This would be the worst of all of these options. An “L” recession means that following a drop, the economy essentially would not grow significantly for a sustained period.

While these models are perhaps oversimplifications of the macroeconomic picture and have obvious limitations, they point to another, more important question: What will the nature of a recovery be? Will it be quick? Smooth? Bumpy? Sluggish?

Time will tell what impact the government’s combination of tax incentives, loan rescue programs, and flooding the financial sector with money will have on the economy. (For instance, some fear “rampant” inflation, which could artificially increase the value of homes and other goods and services.)

Right now, the consensus view from experts on both the general economy and the housing market seems to be that we should expect something like a “U” recession. This isn’t necessarily reassuring in and of itself — think back to what the consensus view on the economy was in early 2007.

Yet, there are reasons to be hopeful. For one thing, consumer confidence is on the rise. The dollar is actually looking stronger than it was a year ago. And the volume of home sales has been creeping up. Still, unemployment numbers and business bankruptcies should moderate any overly positive outlook.

Based on what you’ve observed, what do you think a recovery in the real estate industry and the economy will look like? And when will it come? Let us know!