Mortgage interest rates may be at historically low levels, but the housing industry is not helping the overall economic recovery in the U.S. With the secondary market all but dried up except for Freddie and Fannie, who together purchased over three-quarters of originations in 2011, getting a mortgage these days is near impossible—perfect borrowers need only apply.
Additionally, the practice of extending credit to purchase a home is becoming increasingly difficult for lenders. With QRM and QM regulations waiting in the wings, the “new normal” is definitely a moving target which ultimately will require lenders to further tighten the screws when extending credit. Finally, all of this uncertainty and change is evolving with the backdrop of the ever-looming shadow inventory.
Standard & Poor’s predicts it will take 46 months to clear the nation’s shadow inventory. According to Laurie Goodman at Amherst Securities, “The supply and demand function in housing is broken.”
According to Goodman, we will have approximately 1.7 million homes annually (1.2 million distressed housing units and 500,000 new construction units) added to the housing supply every year for the next six years. But the demand will only be for about 1.2 million units per year.
When you do the math, we will have a deficit of demand of over 3 million units during the six-year timeframe. That is a lot of REOs that will continue to drag on the economy and housing prices.
One ominous path for the housing industry involves a huge surplus of homes available for purchase coupled with lending practices that are so stringent that it is difficult to lend even to creditworthy borrowers.
And what happens after the Dodd-Frank QRM final rule is written will be anyone’s guess.
If the final ruling makes getting a mortgage even more restrictive, Goodman’s conservative prediction of low demand for distressed housing may not be conservative enough. Net/net, unsold REOs will continue to be an albatross on housing prices and neighborhoods can continue to deteriorate unless we develop underwriting standards that can clearly establish a good credit risk and not be so overly cautious and demanding.
Diane Gozza is EVP, Integrated Mortgage Solutions, Houston.
