Foreclosure outlook for 2010
Mortgage Industry Update: Rates, News & More 2010 Outlook
January 2, 2010 by · Leave a Comment
***Smart Financial Weekly Update 2010 Outlook***
Editors Note: At the beginning of 2009 my goal with this update was to give you a glimpse of some of the factors that influence the mortgage and housing industry’s and let you draw your own conclusions. Hopefully that goal has been achieved and you are better informed than you were when we started. As 2009 comes to a close I thought it appropriate to look at what may be in store for us 2010. Finally, I want to thank those of you who have given me an opportunity to assist you or your clients in any mortgage or related matter. I truly appreciate the opportunity!
Interest Rates
The Federal Reserve has been supporting the mortgage market for some months now and that effort is slowly coming to an end. The question is what happens when the Fed support ends? In a normal world private investors would step up and buy the Mortgage Backed Securities (MBS) but that had not been happening so enter the Fed. What is likely is that to attract investors the returns (yields) will have to be higher to allow for the risk these private investors will be taking. This risk allowance means higher rates. If private investors don’t participate that leaves the government and FHA as the only games in town. Neither of these options is especially attractive or sustainable and may be politically challenging.
Moody’s has recently expressed concern over our huge debt which could put pressure on rates unless a “credible plan is put in place to address our debt issues”. A well known Morgan Stanley analyst has said that the 10 year Treasury yield could go as high as 5.50% in 2010 (the yield was 3.84 at the end of 2009) which could push mortgage rates to north of 7%! Finally, the chart below shows that since early 2004 we have generally had mortgage rates at or below 6%.
TIP: If you want to watch an index that is a good indicator of the trend in mortgage rates watch the 10 year Treasury Yield. You can find it at www.cnnmoney.com/markets/bonds and save it to your favorites for reference.
2010 OUTLOOK: Look for mortgage rates to approach 6% and perhaps higher depending on market conditions.
|
When |
Rate |
|
This Week |
5.14 |
|
11/26/09 |
4.78 |
|
10/1/09 |
4.94 |
|
7/2/09 |
5.32 |
|
4/2/09 |
4.78 |
|
1/1/09 |
5.10 |
|
1/3/08 |
6.07 |
|
1/4/07 |
6.18 |
|
1/5/06 |
6.21 |
|
1/6/05 |
5.77 |
|
1/8/04 |
5.87 |
Note that actual market rates vary geographically and by lender, credit score and Loan to Value.
Source: Federal Reserve Statistical H.15.
Mortgage Industry
Towards the end of the year a number of changes in both conventional and FHA loans were published or proposed. For conventional loans Fannie Mae announced it was raising the minimum credit score from 580 to 620 (previously if you put 20% down or more and had 580 to 619 score Fannie Mae would accept the loan) and lowering the minimum debt ratio from 55 to 50 with compensating factors or 45 without. It also looks like the timeframes for eligibility following a bankruptcy or foreclosure will be increased as well.
Recently Fannie Mae and Freddie Mac went to the Treasury Department to get their limits raised on future government support. Turns out that they got what amounts to unlimited support for the future. Reason for this is that if they had waited until January 1, 2010 or later Congress would have to approve increasing the limits. In addition, new accounting rules go into effect in January that would have required Fannie and Freddie to carry an additional $1.5 TRILLION in debt on their balance sheet (they are currently servicing this debt). This additional debt would have required them to raise more capital and that would have been near impossible. Of course, the other option would have been to get the money from the Treasury.
FHA has gone on record that it will announce changes in January and hinted at what they might be. I am sure at least in part these changes are to address FHA’s growing delinquency problem which currently has one in six buyers delinquent or in foreclosure. In all likelihood the minimum score will be increased (something many lenders are already doing), the maximum debt ratio will be lowered, credit history flexibility will be reduced and perhaps even an increase in down payment to 5% (although unlikely). FHA has also recently revised its condo guidelines and now requires projects not approved in the last two years to be “re-certified”. Finally, there is some concern for FHA as it has seen both its volume and share of the market increase significantly (in previous years market share was less than 5% today it’s about 30%) while its reserves have shrunk to well below the statutory minimum.
In 2009 the mortgage industry saw the introduction of much more regulation of how it conducts its business. In May it was the Home Valuation Code of Conduct (HVCC), in July it was the Mortgage Information Disclosure Act (MIDA) and in January it will be the latest revision to the Real Estate Settlement and Procedures Act (RESPA) and the new Good Faith Estimate (GFE). The RESPA changes have been described as the most sweeping since the 1970’s. These regulations and more to come are likely to make the borrower interaction with the loan originator more challenging for both parties.
TIP: A proper and complete pre qualification of will be even more important than in past years. Plus educate yourself on the new regulations as they will impact you and your clients.
2010 OUTLOOK:
Conventional and FHA loans will continue to see qualifying standards become more restrictive and as rates increase affordability will decrease as well. Of course if home prices remain at current levels or decline then the affordability factor will be influenced less. Jumbo loans, VA and specialty loan products (the Rural loan for example) may not change much in the coming year although jumbo pricing will increase and the qualifying standards will remain tight. Look for more regulation to increase the complexity of the loan process and expect delivery (service) to be impacted. Finally, do not expect the first time home buyer tax credit to much of an impact on housing in 2010 and it is unlikely it will be extended again.
Good News
There are a number of factors pointing to an improvement in the overall economy including consumer and business confidence is improving; retail sales are up slightly; durable goods, industrial production and non-farm productivity are all improving and household wealth in the third quarter grew for the second consecutive quarter. In addition the decline in home valuation is slowing and existing home sales seem to be improving. GDP forecasts for next year generally predict modest growth. Employers appear to be more optimistic about hiring full time workers in 2010.
2010 OUTLOOK:
I hope the forecasts for GDP are on target or low as the best way to get people back working again is for the economy to grow. However, we could experience a double dip effect and lose most if not all of the ground we have made up. Since housing is what got us in the current crisis it will be housing that gets the economy back on track. Of course, that means keeping people in homes and getting people back to work.
Statistics of Interest/Concern
· New home sales were down 11% in December, there were only 430,000 new homes sold in 2009 the lowest since 1982 and the number of new homes for sale was the lowest since 1971. No wonder builder sentiment declined in December.
· Third quarter GDP was revised downward to a final 2.2%. Fourth quarter estimates range from 4 to 4.5%.
· Lender Processing Services reported that the combined delinquency and foreclosure rate for all loans thru October was 12.6%.
· Mortgage Bankers Association said this week that MBS (Mortgage Backed Securities) delinquency (30 days or more late) reached 4.06% in the third quarter.
· The FDIC said that on loans held by them the 90 day or more delinquency rate was 3.43% in the third quarter up by .51% from the second quarter.
· According to Real Estate Econometrics LLP unpaid loans on commercial property were 3.4% at the end of the third quarter and could go as high as 5.3% in two years. Of the 35 biggest regional lenders that got TARP money commercial construction loans are 37% of the group’s total loans outstanding.
· The Commerce Department said that consumer spending was flat in October and it revised its September numbers from up .8% to down 1.6%.
· Producer Price Index rose 2.4% from December 2008 to December 2009.
· In the third quarter banks had to repurchase $7.1 billion in defaulted single family home loans this compared to $1.9 billion in the second quarter. Most of the repurchases were by Bank of America and Chase.
· FDIC head Shelia Baer says bank failures will peak in 2010.
Foreclosure
The economy suffered a record 3.9 foreclosures in 2009 following 2008 number of 3.2 million. In addition millions of homeowners are upside down in their homes. Many more are close to being upside down. Deutsche Bank estimates that 1 in 5 homeowners owe more than their home is worth. As shown above mortgage delinquencies are very high and clearly more foreclosures are coming. Worse yet millions of interest only Adjustable Rate Mortgages (ARM’s) and Option Arm loans will be re-setting in 2010 and 2011. These loans will add to the foreclosure inventory at some point. The number of personal bankruptcy’s in 2009 will be double that of 2007 or about 1.4 million. Add it all up and it seems to me that we will be dealing with foreclosures and their consequences for some time to come.
So far the solution to the problem has included HAMP (loan modification); HAFA (new foreclosure program); Deed for Lease program (homeowner leases home from Fannie Mae instead of foreclosing); First Look Initiative (new helps buyers compete with investors on REO purchases); HOPE NOW; NACA and a variety of other organizations trying to help homeowners avoid foreclosure. At this point most observers agree that all of this has had only a modest impact on the problem. Some homeowners have taken it upon themselves and simply walked away from their homes even though they can make their payment (this is called a Strategic Default). These homeowners simply determined that because they owe way more than the home is worth it is financially better for them to walk rather than wait many years for any equity. One solution to this problem is for lenders to reduce loan balances to current market value. Shelia Baer head of the FDIC has proposed this for certain lenders that they insure. In addition, some analysts think that with Fannie Mae and Freddie Mac getting an unlimited line of credit from the Treasury loan balance reductions may be coming and forced on lenders under certain circumstances. If so it will be costly but it is about time in my view.
2010 OUTLOOK:
Unless the various program mentioned above start to make a real difference I don’t see much improvement in the foreclosure situation. However, if we do get an aggressive loan balance reduction program in place and operational in the early part of the year it could make a difference.
Jobs
The year ended with the unemployment rate at 10.0%. For the last week of the year initial weekly jobless claims came in at 432,000 down 22,000 from the previous week a level not seen since July 2006 and the 17th consecutive weekly decline. The four week moving average was also down as well. Continuing claims were down 57,000 to 4.9 million. At year’s end there were 4.7 million workers getting unemployment benefits. CareerBuilders.com reported that in its survey 20% of employers plan on hiring full time employees in 2010. In December the House passed a $155 billion jobs creation program that the Senate will consider in early 2010. Among other things the bill provides for up to an additional unemployment benefit extension of 26 weeks. There is no question in my mind that jobs are the key to recovery. So far it does not look like the stimulus package passed earlier this year has made much of a difference in creating or saving jobs.
2010 OUTLOOK: My view and hope is that by mid-year unemployment moderates and the full impact of the stimulus and other government actions start to pay off.
Commentary/Observations
A lot of ground has been covered so far and I hope you are still with me as we face perhaps one of the most important years since WWII ended. There are still some “wild cards” out there that could influence the recovery and our economy for years to come. Perhaps the biggest wild card is what impact will our enormous debt have on recovery? Recently Congress raised the national debt ceiling to $12.394 TRILLION from just over $12 TRILLION. The states collectively have a massive budget deficit led by California’s $21 Billion deficit. Moody’s has expressed concern that if we don’t get our financial house in order soon our triple A rating could be gone. The European Commission said just this week that after two years of bank system issues and recession the Euro Zone could enter 2010 with a “full blown debt crisis”. At least half of the Zone’s 16 countries public finances are at risk for becoming “unsustainable”. Something has to be done about all of this debt and soon!
Our banking industry is another wild card as it is struggling with historic mortgage, credit card and commercial real estate delinquency. How much of this delinquency turns into foreclosures and loan losses is anybody’s guess. What is clear is that the losses are coming and it is just a matter of when and how big they will be. A partial solution to the housing crisis is to force banks to reduce loan balances but that will just add to their losses. Of course the government could step in and provide some funding but that will just add to our debt and the deficit. Not exactly a good set of choices.
The government wild card may be the most interesting. While Washington has instituted many programs to help deal with the housing and financial system crisis so far these programs appear to have mixed results at best. With a mid-term election coming this fall it will be interesting to see how the key players act.
Another wild card is that at least one well respected bond strategist has suggested that the Bond market bubble will burst and it will be sooner rather than later perhaps even in 2010. His reasoning is the steepening of the yield curve (the difference between the two year and 10 year Treasury yield). Such an event would cause rates to accelerate upward quickly. Tempering this observation is a Market Watch survey of the 18 primary bond dealers which found that most expect the 10 year Treasury yield to be about 3.76% until mid year and finish the year at 4.16%. The reality is that there are too many factors at play and no one knows for certain except that rates will increase in 2010.
Lastly, the risk of inflation is very real. A recent survey by the Conference Board revealed that many consumers believe prices will increase more than 5% in 2010. In addition gold has always been a historic hedge against inflation and it set a record price in 2009. An interesting trend comes from Google by way of Web Search who said that the number of web searches for the word “hyper inflation” increased dramatically in 2009. With all of the government spending and money in the system it seems likely that we will see inflation at some point in the next year or two.
Well, there it is all 2700 or so words! For those of you who have made it this far congratulations and thanks. I hope we have given you something to think about. We live in challenging times and one of the best tools to survival is information. Lastly, I want to wish all of you a very Happy New Year and hope that 2010 brings you all of the success you seek!
If you have any mortgage or related questions please contact me at (602) 803-9660 or by e-mail at burt@gosfm.com.