Former FHFA Chief: Signs of Hope for Housing
The former federal overseer of Fannie Mae and Freddie Mac believes that the housing market may have finally bottomed out — but is hardly in store for a V-shaped recovery.
“We are hopefully bouncing along the bottom at this point,” said James Lockhart, former director of the Federal Housing Finance Agency, speaking at a recent servicing show in Fort Worth, Texas.
Mr. Lockhart, who now works for W.L. Ross & Co., a well-regarded investor in distressed mortgage assets, notes that many potential homebuyers are still sitting on the sidelines waiting to buy, but are afraid to make the final plunge.
He said homebuyers are willing — but fear that after they purchase a house it will fall in value by 10%. “Once we restore some of that confidence we will start to see stability,” he said. The former FHFA chief predicted that the key to the market turning around is the success of two government-mandated mortgage programs, the Home Affordable Modification Program and Home Affordable Refinancing Program, as well as improvements in the short sales process.
The government is in the process of announcing incentives to speed up short sales, giving potential homebuyers a streamlined approach so that Realtors will have updated information at their fingertips and be able to close deals quickly. This, in theory, will cut down on foreclosures.
There is no doubt foreclosures will mount, said Mr. Lockhart at the Five Star Default Servicing Conference & Expo. He believes the Obama administration is trying to slow the tidal wave of foreclosures and by doing so restore confidence in the market. When it comes to housing values there are two key indices that measure repeat sales, the S&P Case-Shiller index, and one created by FHFA. Since the housing crisis began the Case-Shiller index has declined 30% while FHFA's has fallen a more modest 10%. (The latter reflects homes funded by Fannie/Freddie loans, which predominantly are conventional “A” paper credits but also include $400 billion in alt-A and subprime loans.)
In recent months both indexes have stabilized somewhat but over time have reflected sizeable home price declines in five states: Arizona, California, Florida, Michigan and Nevada. These five, not surprisingly, account for two-thirds of credit losses on mortgages.
Subprime ARMs now account for almost 40% of seriously delinquent mortgages. Roughly, 8% of all mortgages are considered seriously delinquent, according to figures compiled by the Mortgage Bankers Association.
"It's unprecedented at this point — that 8% of all mortgages are serious delinquent," said Mr. Lockhart. He noted that even though 5.4% of all “prime” loans are seriously delinquent, Fannie and Freddie have better numbers — in the 3% to 4% range. “Given that relatively good performance, when you're sitting on $5.5 trillion of mortgages, it's going to hurt,” he said.
On a quarterly basis Fannie and Freddie currently are suffering from combined loan markdowns of more than $8 billion and have been building loss reserves dramatically. Their former regulator believes this will continue until unemployment declines and the overall economy improves. But, he warned, if home prices fall another 20% “all bets are off.”