WE’RE HEARING signs of a housing recovery have been sighted along the road for quite a while now, but there’s been a sputtering quality to the recovery that left homebuyers and lenders jittery about the housing market’s future.
Well, now it finally seems that the sputtering has come to an end. Almost all of the loan performance data released recently has pointed toward stabilization and recovery in the housing sector.
Overall home loan delinquencies fell to 7.09% at the end of last year, the lowest level since 2008, according to the Mortgage Bankers Association. The foreclosure start rate and the percentage of loans in the foreclosure process also fell in the fourth quarter of 2012.
And CoreLogic’s home price index jumped 10% in February on a year-over-year basis, reaching its highest level in seven years. Home prices have increased for 12 consecutive months.
And, most recently, credit bureau Equifax reported that the volume of home finance balances that were written off in the first quarter of 2013
Anyone who has followed the mortgage industry as long as I have will recognize that those are still high delinquency and write-off numbers from a pre-Great Recession perspective, but the needles are all pointed in the right direction: recovery.
Amy Crews Cutts, chief economist at Equifax, said one of the key factors driving improvement in the market has been the increasingly rapid marketplace absorption foreclosed property, driven in part by investors who are purchasing multiple homes at a time and converting them to rentals. Clearing the inventory of REO and homes entering foreclosure has helped stabilize prices and provide momentum for the recovery. Investor purchases are also building confidence that the housing recovery is real.
“We need investors. What we don’t need is speculators,” Cutts said.
Greater approval of short sales, especially in judicial states with long foreclosure timelines, also is helping reduce the “shadow inventory” of foreclosures that has been a drag on the housing market.
She said there is a great “feedback loop” of news coming out of the loan performance data. The number of loans entering the 30-day delinquency category is coming down, as is the number that advance from 30 days past due to more serious levels of delinquency. At the same time, the pace of foreclosure sales and short sales has increased, helping to reduce the pipeline of homes moving toward REO status.
With house prices finally rising, that is helping people who are just barely hanging on to avoid foreclosure by selling their home.
She noted that CoreLogic data suggest that if home prices rise 5%—the historical average appreciation rate before the boom years—that would lift about 1.8 million underwater mortgages into positive territory.
“We don’t need very much housing price appreciation to really change the landscape,” she said.
The changing outlook for the housing sector isn’t just helping servicers. It’s also providing new fuel for the loan origination sector. In recent years, mortgage debt outstanding has declined as people paid off loans or refinancing into shorter loan terms with faster amortization. Charge-offs of defaulted mortgage debt also contributed to the decline in mortgage debt outstanding.
Now, new home purchase lending is starting to push up mortgage debt outstanding again at a pace that exceeds the volume of debt lost to curtailment of mortgage debt or charge-offs, a momentum shift that Cutts expects to continue.
Still, obstacles remain to a full-fledged housing recovery remain. Cutts noted that it remains very difficult, outside of the FHA program, for first-time homebuyers to obtain a low downpayment mortgage. A first-time buyer eyeing even a modest $200,000 home would have to come up with $40,000 to meet the traditional 20% downpayment requirement. That leaves many potential buyers priced out of the market. Many young buyers also face the challenge of
Today’s tight underwriting standards are especially challenging for borrowers who fall just shy of today’s tighter credit underwriting standards.
“The ability of people to buy a home with a downpayment of less than 20% I think is very important for the home market to really get back on its feet,” Cutts said.
“The lack of credit availability in the near prime credit territory I think is a challenge as well.”
A lot more people would join in on the housing rebound if only they could get approved for a home loan.
But even on that front, the horizon may be brightening for some people. A foreclosure usually has a negative impact on credit reports for seven years. For those who fell into foreclosure as the crisis began to unfold in 2007, they could be back in action as soon as 2014.
Ted Cornwell has covered the mortgage markets since 1990. He is a former editor of both Mortgage Servicing News and Mortgage Technology.
