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 perspective.
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 underwriting.
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.
Municipal Housing Industry:
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 federal appropriations.
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.
Senior Director, Coldwell Banker New Homes Division
With over 200 condominium, townhome and loft projects successfully marketed
“Fewer properties for sale with such remarkably low interest rates make it a great time to sell but a more difficult time to buy”