Standard and Poor's Ratings Direct
Service has made some projections for the coming year. In addition to numerical forecasts for the
economy as a whole, house prices as reflected by the S&P Case-Shiller
Indices, interest rates, and mortgage financing, S&P says that each part of
the market will be affected one way or another based on the housing, economic,
and political landscape of 2014. With
this in mind they briefly discussed, in their U.S. Housing and Residential Mortgage Finance: 2013 Outlook some housing related sectors
going into the new year and how the company views them from a ratings
Banks will continue cost-cutting as
interest rates rise and mortgage activity moderates. Some large institutions have already reduced staff
and pipelines have shrunk. S&P
expects banks will continue to work through risky loans, minimizing charge-offs
and non-performing assets which will also lower expenses for their servicers. They have also continued to negotiate with
Freddie Mac and Fannie Mae (the GSEs) over repurchase claims which should
translate into smaller reserve levels going forward.
Sales to the GSEs has declined because
of increased competition from other originators and less investor interest in
longer fixed-rate assets and rising rates will continue to shrink
profitability. On the upside, rising
home prices should enable some home owners to refinance and has turned consumer
sentiment more favorable regarding home ownership. S&P expects a shift from refinancing to
purchasing but with less volume overall.
Banks will continue to put excess deposits into their loan portfolios
and will continue underwriting jumbo mortgages, particularly adjustable rates
ones for their balance sheets. Credit
quality will continue to improve along with economic conditions and more stringent
The future of Fannie Mae and Freddie Mac
is still under discussion but it is clear that both the administration and
Congress intend to wind them down and this year lawmakers introduced concrete
plans to do so. Regardless of the timing
or specifics of reducing the GSEs' role, S&P believes the government will
continue to support their debt obligations and that they will continue to
remain profitable in near-term. The GSEs
will continue to focus on providing liquidity to the housing market, while
shrinking their investment portfolios and building the infrastructure of a
future housing finance market.
Housing issuers within U.S. public finance
are more affected by decisions of the U.S. federal government than by the status
of real estate markets. Housing finance reform may endanger the federal
government's longstanding role in promoting affordability and austerity aimed
at public housing has implications for housing availability and credit quality.
S&P says it haven't noted changes
in ratings because of declining federal support for housing but municipal
issuers with federal guarantees should fare better than those reliant upon
Affordable single-family housing ratings
of housing finance agencies (HFAs) remain strong with 83 percent having AA-
ratings or better compared to 75 percent before the downturn. Equity-to-assets
ratios are at historical highs, nonperforming asset ratios are improving, and
almost all HFAs have positive net income.
S&P expects multifamily housing to
have better outcomes where there is strong federal support such a debt issues
backed by GSE or Ginnie Mae or armed forces housing. Department of Housing and Urban Development
(HUD) support is less certain; its funding declined by 12 percent between 2008
and 2012. Sectors with less federal
support will be subject to more stress and their ratings will be more subject
to market forces.
Housing finance reform is an issue for municipal
issuers. The two main proposals increase down payment requirements to 5%,
higher than the 3.5% of many affordable single-family loans offered by HFAs. Where an HFA provides down payment
assistance, making up the difference could mean additional costs and could decrease
their participation in the affordable housing market
Buyers took a step back in the first
half of 2013, giving the market time to absorb and re-adjust to the market
dynamics. Home sales and price appreciation were slowed by a combination of
rapid price increases, higher mortgage rates, the government shutdown, and
normal seasonal patterns. S&P views
the moderation as healthy given the previous pace of growth, particularly of home
prices and expects that homebuilders will still report strong revenue and
earnings growth in 2013.
S&P also expects supply and demand
fundamentals to remain good through 2013 with rising employment and expanding
household formation supporting demand while low levels of construction
constrain supply. The recovery in home
building, however is fragile and it could take an uneven trajectory. S&P expects most builders to selectively
use incentives to retain last years increased average sales prices. Revenue should be driven by new planned
community openings and EBITDA growth over the next 12 to 18 months but it credit
metrics will strengthen at a slower pace as builders borrow to meet growing
demand and exhaust the large cash reserves that supported their ratings through
In the S%P's view, 2014 should mark a
return to profitability for the mortgage insurance (MI) sector, barring any
macroeconomic setbacks. While their legacy portfolios continued to contribute
losses in 2013, new notices of delinquency (NODs) are declining and claims
severity is improving. The ratio of new
vintages and their contribution to profits should continue to increase and lead
to lower losses and improved MI performance.
The regulatory changes under
consideration could be favorable for MIs.
Negotiations with the GSEs on capital requirements could end the need to
operate under capital waivers from state insurance regulators and they have
recently finalized a Master Policy with the GSEs.
The increased insurance premiums and
more stringent underwriting requirements of the FHA have, in the rating service's
view, allowed MIs to gain market share. At the same time, however, the GSEs
higher guarantee fees have effectively increased the price of mortgage
insurance. Several MIs recently reduced
premiums by 10%, which could help counter the guarantee fee increases. While
the net effect of the changes for 2014 is uncertain, there could be some
stabilization in these market shifts.
The high credit quality of new insurance
and the improving housing market and economy should result in a profitable MI
business and near-term capital accumulation.
The recovery remains at risk and a new recession could reverse the
declining trend of defaults and rising claims could prevent the MIs from
raising the capital necessary to write new business through a downturn.
Residential mortgage servicers were
focused in 2013 on complying with existing regulations and implementing the
Consumer Financial Protection Bureau's (CFPB) final servicing rules. The new rules, which go into effect on
January 10 (many of which concern default management) apply to all servicers
and, S&P says, provide the industry with clarity going forward.
Residential servicers benefited from low
mortgage rates in the first half of 2013.
These led to refinancings of existing servicing portfolios, helping to
lower run-off and retain customers. However,
rising rates in the second half of the year led to lower refinancing volume and
some servicers reduced staff.
Transfers of mortgage servicing rights
(MSRs) continued in 2013, with many transfers going to nonbank servicers. Because MSRs are no longer considered Tier I
capital holding the MRSs would have required holding additional capital. On the
positive side, rising interest rates tend to raise the MSR values because they
are associated with lower prepayment speeds so servicers with large MSR
portfolios could realize higher mark-to-market gains although at a diminishing
rate. Consolidation in the industry
continues as nonbank servicers acquire mortgage servicing operations.
The CFPB will begin monitoring servicer
compliance with its rules, and the national mortgage settlement monitor will
expand its testing scope. Transfers of MSRs to nonbanks from banks will
likely continue as will sales of servicing operations and portfolios as the
CFPB servicing rules could raise barriers to entry for new servicers. Aggressive growth strategies might increase
operational risks, as servicers must add and train staff, maintain systems, and
focus on internal controls and compliance.
As portfolios run off, some servicers
could begin to originate their own loans.
Large bank servicers may continue to stop servicing defaulted assets to focus
on servicing new originations. GSE
reform may affect GSE servicers if it results in changes to their servicing
standards. CFPB's final servicing rules could
result in more consistency and perhaps better experiences for the borrowers, as
the rules apply to all servicers.
Increasing interest rates lowered
mortgage origination volumes in the second half of 2013 and these lower volumes
will continue into 2014. Non-agency
mortgage originations centered on high-quality prime jumbo mortgage loans and
there was not a notable decline in the quality of these loans at year end. However S&P says that the diminishing
population of high-quality prime jumbo refinance options, a larger portion of
purchase activity, rising home prices, no increase in the conforming loan
limits, and more favorable economic conditions, should lead to a greater
emergence of jumbo mortgage lending.
New rules going into effect in January
establish rules for the eligibility of a qualified mortgage (QM) and
originators have invested in platforms and tooled their businesses to reflect
these parameters. S&P expects
non-agency securitization volume in 2014 to reach almost $40 billion, approximately
30% higher than the 2013 forecast of $29 billion. About two-thirds of the total will be prime
jumbo originations and the remainder GSE risk-sharing transactions and
less-traditional securitizations, such as REO-to-rental. "Although mortgage
rates have gone up and the wave of refinancing activity in 2013 has fallen, the
2014 lending landscape...bodes well," the report says.
On a more general basis S&P expects
its Case-Shiller 20-City Home Price Index to rise by 6 percent from December
2013 to December 2014, half the pace of the previous year. Unemployment will fall below 7 percent and
there will be real GDP growth of 2.6 percent.
The company expects a shift in mortgage products toward adjustable rate
mortgages in the new year and projects the 30-year fixed rate mortgage at 4.6
percent in the fourth quarter compared to 4.2 percent in Q4 2013.
The ratings firm says that the
availability of mortgage financing remains the lynchpin as we hover around a
64% home-ownership rate. The GSEs and Federal Housing Administration (FHA)
continue to be responsible for buying or insuring most new originations, and the
lower-than-average homeownership rate and swarm of investor purchases of the
last 18 months might or might not be a long-term model for U.S. housing. This model also relies on a substantial U.S.
government guarantee which is not a popular option among the various housing
finance proposals under consideration.