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Home Sales Rally Amid Mortgage Questions

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Existing home sales took a huge and unexpected jump upin December.

Not only was the seasonally adjusted monthly increase up over 12 percent, but the unadjusted number was even higher.

The question of course now is, given that inventories always rise this time of year, can this sales surge be sustained?

The biggest roadblock in the housing market today is financing, and financing is now on the main table in Washington, as the Obama Administration sets to release its plan to reform Fannie and Freddie and as federal regulators decide what exactly constitutes a Qualified Residential Mortgage under Dodd-Frank's risk retention requirement. A QRM exempts the bank from having to hold on to 5 percent of the loan, when it sells the loan off into the marketplace (skin in the game). There is also renewed talk of dropping the mortgage interest deduction.

Today a new contributor joined CNBC. Michael Barr recently left his post at Treasury as Asst. Secretary for Financial Institutions. He was behind the Administration's mortgage bailout, Dodd-Frank and was in discussions on Fannie and Freddie reform. He says don't get excited for a big roll-out on Fannie and Freddie because the Administration knows what its up against.

"There’s a real debate going on now about just how far to go in this report that Treasury’s going to put out at the end of the month," says Barr. "I think the situation has become much more difficult politically given the ascendancy of the Tea Party and the House Republican takeover."

Barr says he would like to see a government guarantee in the mortgage market going forward, "One that's explicit and fully paid for." But just this morning Rep. Jeb Hensarling (R-TX) backed a plan to eliminate Fannie and Freddie entirely and privatize the mortgage market. Hensarling is Vice-Chair of the House Financial Services Committee.

Republicans were vocal about this last summer but then pulled back in the Fall, as many of their constituents in the real estate market warned such a plan would totally derail housing's recovery. Now, with leadership in the House, they appear to be back on their track.

There is no question GSE reform will be a long, hard-fought battle, and no plan will take place overnight; it will cause uncertainty in the market for lenders, and uncertainty is never good.

The QRM debate will happen sooner, as regulators are readying their plan for comment, and real debate begins in April.

"We believe regulators are leaning toward a 20 percent down payment requirement for mortgages to meet the Qualified Residential Mortgage exemption," writes MF Global's Jaret Seiberg. He says that would further tighten the supply of mortgage credit, which would in turn hit housing by making loans more expensive. It would also hurt smaller lenders.

"I think it is going to be harder for small players that are thinly capitalized to play in the way that they did at the heart of the subprime boom. I’m not sure that’s a bad thing," admits Barr.

Today's numbers were hands down, no argument, really good news for the housing market, but we're not out of the woods yet. Banks are ramping up foreclosures again (36 percent of all December sales were foreclosures or short sales), and lending is, to put it mildly, in flux. Credit availability is crucial to housing's recovery.

Questions? Comments? RealtyCheck@cnbc.comAnd follow me on Twitter @Diana_Olick

  • Diana Olick serves as CNBC's real estate correspondent as well as the editor of the Realty Check section on CNBC.com.

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