Looking for a Bottom

Mortgage servicers - along with investors, originators, builders, and just about everyone else with a stake in the housing sector - are still wondering when values will stabilize. So far, the news isn't pretty. Both Case-Shiller and federal housing regulators say that home values continued to fall late in 2008. The volume of home sales also plummeted to record lows. Low interest rates on conforming mortgages provided a source of optimism, but so far data show that most loans that are being taken out are refinancings, rather than home purchase loans.

Economic anxiety has many potential buyers sitting on the sidelines, while several million borrowers who are coping with a loss of income, employment uncertainty or problematic loan resets are struggling to keep their homes. Optimistic economists predict that home values may begin to stabilize late in 2009. The less optimistic ones see the housing sectors problems continuing to mount, with perhaps several more years of pain as a weak market struggles to absorb a mounting backlog of homes for sale.

As most economists will tell you, predicting a bottom is next to impossible. First off, housing markets don't all move at the same pace or in the same direction. Some markets face much weaker - or stronger - prospects than others. That means lenders will have to keep an eye on local conditions to make decisions about investment, collections, loan workouts, foreclosure, and asset sales.

The challenges facing mortgage servicers this year run deeper than just home prices. Widespread layoffs have pushed up the unemployment rate, and it's expected to rise even further this year. Servicers are under pressure to help keep troubled borrowers in their homes, but the weak job market and falling home values are limiting options for loan workouts. Moreover, federal legislation seems likely to reignite the fear of mortgage cramdowns in bankruptcy cases.

To top it off, on top of these woes, servicers are likely to face higher portfolio turnover this year. In late December, Freddie Mac reported that the interest rate on 30-year mortgages had fallen to its lowest level in more than 30 years.

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