Refi Boom, Rise of FHA Big News in Mortgage Markets
At a time when conventional 30-year fixed-rate mortgage loans are lingering at their lowest levels in half a century, a major boost in refinancing is making big news in the nation’s mortgage markets, said panelists at last week’s NAHB Construction Forecast Conference in Washington, D.C.
With the federal government stepping up its role to support the housing finance system, affordable financing is also available as a draw for prospective home buyers who have good credit and can make a downpayment and document their income, said Freddie Mac Chief Economist Frank Nothaft.
On the negative side for the housing market, mortgage defaults are likely to continue to rise over the course of this year and won’t show improvement until joblessness stops rising.
Mortgage refinancings have accounted for 75% of loan applications over the past three months, Nothaft said, and refis in 2009 are expected to be double those originated last year “and may go a bit higher,” with positive implications for the household finance of those who are reducing their monthly payments.
Both Nothaft and Fannie Mae Chief Economist Doug Duncan credited the current decline in mortgage rates to intervention by the Federal Reserve to buy up securities and debt by the government sponsored enterprises.
The Administration’s Homeowner Affordability and Stability Plan is also set to help some four to five million home owners refinance loans owned or guaranteed by Fannie and Freddie, Nothaft said, with allowable loan-to-value ratios as high as 105%.
After slowing to a crawl at the height of the housing boom when subprime lending was on the rise, Federal Housing Administration insurance is back in business in a big way, Nothaft said, with its loan volume up sharply as buyers take advantage of the program’s 3.5% downpayment requirement.
FHA lending surged to 29% of single-family mortgage originations in the final quarter of last year, up from about 2% in the 2005 to 2006 period, the highest it has been since 1942, he said. When VA loans are added, the two government housing programs accounted for about one-third of the market at the end of last year, “a big change.”
Another major development in today’s mortgage market is that subprime and Alt-A lending have virtually disappeared; from 2001 they quintupled to about a 34% share of the $3 trillion in single-family loans originated in 2006. Conventional, conforming prime loans accounted for a full 62% share of those originations last year, up from 33.2% in 2006.
In the secondary market, the private label mortgage securities that blossomed during the subprime lending craze, accounting for more than half of mortgage-backed securities at their peak, have faded away, Nothaft said, leaving the market almost entirely to Fannie, Freddie and Ginnie Mae.
Even though they accounted for about only 15%, or 8 million, of the 55 million mortgages outstanding, private label securities held 50%, or 1.7 million, of the 3.46 million loans that were seriously delinquent at the end of last year.
While White House efforts to modify problematic loans with at-risk borrowers will help reduce foreclosures, Nothaft indicated that prime borrowers are also now contributing to defaults, primarily because of the weak state of the economy.
“There is a direct correlation between job losses and increases in delinquency rates,” he said. “If unemployment rises higher, it will trigger additional delinquencies.”
Survey research by Freddie Mac using only data from prime buyers found that the leading cause of delinquency in 2007 was unemployment or the curtailment of income, which was cited by 43% of those who had fallen behind on their payments. The second biggest factor was illness or a death in the family, which accounted for 25.5% of the delinquencies.
“We have poured a lot of things into the housing policy beaker,” said Fannie Mae’s Duncan, but he was not optimistic that everything is in place to support a full-scale housing rebound.
Borrowing $1.23 last year for every dollar they earned, households need to further reduce their ratio of debt to disposable income, he said, and that could cut into the amount of consumption that’s needed to fire up housing and the economy.
The crisis in the subprime mortgage market, he said, “was just the trigger to reveal the excess leverage” on the balance sheets of households and financial institutions.
Duncan also voiced concern that lending standards, while not tightening as much as they were, have still not loosened up to accommodate many potential home buyers, and he suggested that there might be further downward pressure on housing prices and a potential for more foreclosures.
“It is not clear we are through this storm yet,” he said.
Photos by Morris Semiatin