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For the past year the Federal Reserve’s voracious $1.25-trillion purchase program of mortgage-backed securities has effectively pushed the 30-year conforming fixed-rate mortgage lower than it would normally be. Typically the conforming FRM is about 25 basis points lower than the rate on a jumbo mortgage. According to Bankrate's latest weekly survey, the difference is more than one percentage point (6.24% vs. 5.19% as of Nov. 10).

But the Federal Reserve has signaled that it intends to wind down its purchase program by the end of the first quarter of 2010. Analyst Meredith Whitney recently dubbed the Fed’s “Great Exit” the biggest risk for banks and the markets over the next four months.  And consumers.

Absent another big buyer (or set of buyers) stepping up and taking the Fed’s place, rates would likely rise. If the jumbo/conforming spread reverts to its historic norm, we’re looking at a 30-year fixed rate mortgage closer to 6% based on today's levels. That could translate into a decline of 10% or so in home buyers' purchasing power. A $300,000 mortgage at 5.02%, for example, works out to about $1,614 a month. At 6% you’d need to drop the mortgage amount to less than $270,000 to keep the monthly payment at $1,614. As Amanda Gengler points out in her 2010 Housing Outlook, prospective buyers and refinancers should look to lock in a rate sooner rather than later.

It is  official.  The homebuyers' tax credit has been extended to April 30, 2010.

President Barack Obama approved the extension as part of a $24 billion economic stimulus bill signed Friday.  The bill also includes an extension of unemployment benefits to the longtime jobless and tax credits for some businesses.

The housing tax credit portion of the bill extends the $8,000 tax credit for home buyers who are purchasing their first home from the current November 30 deadline and expands the program to offer a credit of $6,500 to other homeowners who have lived in their current home for at least five years and are seeking to relocate. 

Another modification to the original legislation raises the income limits for program participation from $75,000 for a single purchaser to $125,000 and from $125,000 to $225,000 for a couple.  There are also credits available on a diminishing basis above those income limits.

$8,000 First-time Home Buyer Tax Credit at a Glance

• The $8,000 tax credit is for first-time home buyers only. For the tax credit program, the IRS defines a first-time home buyer as someone who has not owned a principal residence during the three-year period prior to the purchase.
• The tax credit does not have to be repaid.
• The tax credit is equal to 10 percent of the home’s purchase price up to a maximum of $8,000.
• The tax credit applies only to homes priced at $800,000 or less.
• The tax credit now applies to sales occurring on or after January 1, 2009 and on or before April 30, 2010. However, in cases where a binding sales contract is signed by April 30, 2010, a home purchase completed by June 30, 2010 will qualify.
• For homes purchased on or after January 1, 2009 and on or before November 6, 2009, the income limits are $75,000 for single taxpayers and $150,000 for married couples filing jointly.
• For homes purchased after November 6, 2009 and on or before April 30, 2010, single taxpayers with incomes up to $125,000 and married couples with incomes up to $225,000 qualify for the full tax credit.

The $6,500 Move-Up / Repeat Home Buyer Tax Credit at a Glance

• To be eligible to claim the tax credit, buyers must have owned and lived in their previous home for five consecutive years out of the last eight years.
• The tax credit does not have to be repaid.
• The tax credit is equal to 10 percent of the home’s purchase price up to a maximum of $6,500.
• The tax credit applies only to homes priced at $800,000 or less.
• The credit is available for homes purchased after November 6, 2009 and on or before April 30, 2010. However, in cases where a binding sales contract is signed by April 30, 2010, the home purchase qualifies provided it is completed by June 30, 2010.
• Single taxpayers with incomes up to $125,000 and married couples with incomes up to $225,000 qualify for the full tax credit.