Fitch: Housing Market Downturn Affects Municipal Credit

While the housing market has registered a limited economic effect on certain areas of the nation to date, delinquency and foreclosure levels and trends indicate an emerging pressure for several states, according to a recent report released by Fitch Ratings.

Fitch's report, entitled, "The Emerging Economic Effects of the Housing and Mortgage Market Downturn on Municipal Credit," focuses on the potential impact of the housing and mortgage market downturn on municipal credit quality. Including fourth-quarter 2006 data, it identifies those states and metropolitan statistical areas where housing price declines or decelerations are most apparent.

Delinquencies and foreclosures are worse in areas facing other economic challenges, such as Midwestern states confronting domestic auto and related manufacturing downsizing, specifically Ohio, Michigan and Indiana, and in those states still rebounding from Hurricane Katrina, including Louisiana and Mississippi.

Traditional economic factors, such as income and employment levels, are the primary reason for rising or high mortgage foreclosures. Delinquency and foreclosure rates, according to Fitch, are still relatively low in the formerly hot markets of Arizona, Florida, California and Nevada, where MSA housing price declines and decelerations, particularly in Florida and Arizona, were among the greatest in 2006.

However, the rate of growth in delinquencies and foreclosures is rising in these and other states and in turn could exert its own economic influence. Aside from increasing housing inventory, which can further suppress home prices and pressure an already weakening housing market, other influences could include reduced consumer and economic activity, which affect governmental tax revenue that is already sensitive to reduced residential construction activity.

Housing downturns have certainly occurred in the past and it is not surprising that it can have an economic impact. The effect of this downturn may be distinguished for two reasons. The first is the prior strong growth in residential prices over the first half of this decade, despite a national recession. The second reason is the emergence of a sizable subprime and ARM market, due in part to more liberal lending standards.

This combination has compounded financial difficulties for homeowners as limited price appreciation or decline hinders the ability to forestall repayment difficulties by refinancing home mortgage loans.

A mitigating factor, according to Fitch, may be the efforts of lenders and other entities to help refinance borrowers out of troubled loans. Also, the direction of the national economy could largely offset the impact of the housing market decline in those areas with strong or improving regional economic trends.

Comparison of fourth-quarter median home price data for 2005 and 2006 confirms a national home price correction has been under way, with the U.S. median home prices down 2.7% in that period. During the past year, the Midwest has fared the worst with a regional drop of 4.2%, followed by the South with a 3.7% fall and the Northeast declining 2.5%. In the West, median home prices rose 0.4%, led by areas in Oregon and Washington.

Fitch says many of the MSAs that underwent the most notable declines in median home prices from 4Q05 to 3Q06 saw home prices continue to slide in 4Q06, particularly in Florida. However, due primarily to traditional economic reasons, several Midwestern MSAs also began trending downward, especially in Ohio's major urban centers, as well as parts of Indiana and Michigan. Such declines in the Midwest reflect, at least in part, challenged manufacturing-based economies combined with low-to-negative employment and population growth.

To identify the areas with the greatest deceleration in home prices, Fitch calculated a "swing factor," determined by subtracting the nominal percentage change in home price between 4Q04 and 4Q05 from nominal change between 4Q05 and 4Q06. By this measure, the greatest deceleration is still in Florida, Arizona, California and Greater Washington, D.C..

Some data obtained for the report were made available through the National Association of Realtors. (c) 2007 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com