Tag Archives: Freddie Mac

U.S. Housing And Residential Mortgage Finance 2013 Outlook: Homebuilders Benefit From Demand For New Homes

U.S. Housing And Residential Mortgage Finance 2013 Outlook: Homebuilders Benefit From Demand For New Homes

Senior Director, Structured Finance
Standard & Poor’s Ratings Services

Buyers for newer homes returned to the single-family home market in 2012, resulting in better than expected operating results for most of the homebuilders we rate. Sales volumes and average selling price exceeded our initial expectations, and we currently expect that the homebuilders we rate will deliver on average 20% more homes in 2012 compared with 2011. Most new homebuilders have also posted healthy increases in average selling prices, outpacing overall market trends, as buyers gravitated toward competitively positioned new home communities and the supply of existing homes for sale has remained very low.

Despite our expectation that favorable housing demand and supply fundamentals will continue to support strong revenue and EBITDA growth in 2013, our outlook on the homebuilding sector remains stable. Improved fundamentals reduce downside risk in our view, particularly for the lowest rated companies, but we expect upside rating momentum will likely be more muted as homebuilders draw down their sizable cash balances (a primary support to liquidity over the past few years), and raise additional debt capital for future land and inventory investment in anticipation of higher sales volumes. The effect of this additional debt issuance will likely slow the leverage improvements necessary for more positive rating actions over the next 12 months.

We also remain concerned that the impact of a potential recession in the U.S. would be more significant for homebuilders than many other sectors, since a drop in consumer confidence would likely derail buyers’ appetite for large discretionary purchases such as single-family homes. In addition, decisions on numerous regulatory and policy initiatives that would have an impact on housing are slated for the first half of 2013, many of which could significantly affect the availability and cost of mortgage financing.


The mortgage insurance sector continued to experience losses stemming from their legacy portfolios in 2012, leading to reserve adjustments and higher expected losses from delinquency to claim. Despite the reserve adjustments mortgage insurers have taken, reserve adequacy remains a significant risk, particularly given the capital impairment of many of the mortgage insurers remaining. We expect losses to continue through 2013 into 2014, although new notices of default should continue to trend downward barring a setback in the economy or housing markets.

Regulatory risk also remains heightened. Many of the mortgage insurers are operating under capital waivers from state insurance regulators allowing them to continue writing new business. Despite the ongoing depletion of capital, however, there appears to be little appetite on the part of either the state insurance regulators or the GSEs to discontinue allowing new business writings or accept the mortgage insurance paper from a counterparty perspective. Indeed, moves by Freddie Mac toward settling a dispute with Mortgage Guaranty Insurance Corporation (MGIC), acceptance of a voluntary runoff plan with higher claim payments for Republic Mortgage Insurance Co. by the North Carolina Department of Insurance, and permitted practices that the Wisconsin Office of the Commissioner of Insurance has allowed appear to be indicative of a shift toward greater accommodation.

We expect the very high credit quality of new insurance being written, combined with improvement in the housing markets and economy, to result in this business being profitable and capital accretive. Nevertheless, significant risks to the economic recovery remain. Should a recession occur in 2013, the declining trend of new notices of default could reverse and claim frequency could increase to an extent that could force several mortgage insurers into regulatory supervision and voluntary run-off.


Fannie Mae and Freddie Mac remain vital cogs in U.S. mortgage finance. The two combined to guarantee roughly 70% of new mortgages in the U.S. through the first nine months of 2012 and are effectively providing market liquidity at a time when private capital remains scarce. They continue to receive the financial support of the U.S. Treasury, and the Federal Reserve has committed to buying $40 billion of their mortgage-backed securities each month until economic conditions improve, meaning rates should stay low. Their financial results have improved because new loan loss provisions have declined, in line with their falling delinquencies, but potential losses within their single-family guarantee portfolios remain substantial. We believe the September 2012 amendments to their investment agreements with the U.S. Treasury ensure that sufficient financial support for these entities remains in place for the foreseeable future, which means they will be able to continue to support the U.S. housing recovery in 2013.


For more than a decade, U.S. public finance issuers have faced increasing competition from commercial lenders for the first-time low- to moderate-income homebuyers they traditionally serve. Competitive mortgage products and persistent low interest rates have caused many U.S. housing finance agencies (HFAs) to use variable-rate debt, coupled with hedges and other structures, to enable them to actively issue bonds while maintaining competitively low rates. Because HFAs’ mission is to provide affordable housing options for low- to moderate-income families, some of these issuers have searched for alternatives to mortgage revenue bonds for financing loans and have used these methods more increasingly in 2012.

We found that these issuers are using a variety of mortgage product options to fund their programs. These options include mortgage-backed securities (MBS) to the “to be announced” (TBA) market, the forward trade of Ginnie Mae issued MBS that guarantee HFA originated mortgages with delivery of the MBS to the market investor prior to the established trade settlement date, and direct purchase loan participation pool sales to financial institutions. In addition, HFAs are originating home mortgages under their guidelines, insured by the federal government under the Federal Housing Administration (FHA), and selling them directly to financial institutions. They are also originating whole loan HFA program guidelines and selling directly to GSEs (Fannie Mae or Freddie Mac) for cash.

The investors in the HFAs’ alternative funding products vary. Fannie Mae and Freddie Mac purchase whole loans directly from the HFAs through various programs that include recourse to the HFA during the earlier part of the loan’s term. Market activity suggests that insurance companies, individual investors, and some institutional investors (through brokers) are purchasing MBS through the TBA market. We expect this shift in mortgage funding among HFA issuers to prevail in 2013 and over the long term. While direct sales of loans to the GSEs remain a viable alternative for the HFAs, the agencies’ receivership status may impair their long-term capacity to purchase whole loans. As the U.S. public housing sector continues to evolve, HFAs’ ability to identify and use alternative sources for mortgage funding, while also recognizing and mitigating the risks of these alternative options, will be critical to their credit strength and, ultimately, to their sustainability over time.

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JCHS: More Working Americans Struggling to Afford Housing

More Working Americans Struggling to Afford Housing

by Eric Belsky

Managing Director
With growth in incomes lagging growth in housing and utility costs, the share of Americans spending large sums of their income on housing has climbed nearly uninterrupted for decades.  But the Great Recession has taken an especially heavy toll, as millions of families have slipped down the income scale due to job loss or curtailment of hours. Indeed, while households with incomes under $15,000 made up only 12 percent of all households in 2001, they made up 40 percent of the net growth in the number of households over the past ten years. Faced with reduced incomes, some of these households have moved so that they can save on housing costs but many others are instead stretching to make their rent or mortgage payments.As shown in Figure 1, even households with incomes above $15,000 (slightly above the equivalent of full-time work at minimum wage) are finding it harder to keep up with housing costs.  Fully 64 percent of all households with incomes in the $15,000-$30,000 range are housing cost burdened, spending 30 percent of their income on housing and utilities. Among those with incomes of $30,000-45,000, a smaller but still substantial 42 percent are cost burdened, while more than a quarter of those with incomes in the $45,000-$60,000 range are cost burdened. These shares are each up over seven percentage points across all three of these income bands in just the past ten years.

Notes: Income groups are defined using inflation-adjusted 2011 dollars.  Cost-burdened households spend more than 30% of pre-tax household income on housing costs. 

Source: JCHS tabulations of US Census Bureau, American Community Surveys.

Renters and owners are both experiencing rising housing cost burdens. On the rental side, the share of renters with cost burdens has doubled, from a quarter in 1960 to a half in 2011, while the share with severe cost burdens (spending more than half their income on housing and utilities) shot up from 11 percent to 28 percent over that period, spiking in the last decade. Renters with incomes of $15,000-$30,000 who have severe cost burdens climbed from 2.0 million in 2001 to 3.2 million in 2011, and those with incomes of $30,000-$45,000 doubled from 300,000 to 600,000.

Cost burdens have also reached record highs for homeowners. Among homeowners under age 65, 39 percent of those earning one to two times the minimum wage and 18 percent of those earning two to three times the minimum wage are now severely housing cost burdened.

Notes: Income groups are defined using inflation-adjusted 2011 dollars.  Severe housing cost burdens are households who spend more than 50% of pre-tax household income on housing costs. 

Source: JCHS tabulations of US Census Bureau, American Community Surveys.

There is an irony to the situation of homeowners: millions of them can’t take advantage of today’s low rates to lower their housing costs because their homes are worth less than they owe on their mortgages. Despite many federal efforts to ease the path to refinancing for such owners, it remains blocked for large shares of them.  Those who have loans not endorsed by FHA, Fannie Mae, or Freddie Mac are out of luck.  And for those with loans endorsed by these agencies, they may still not meet credit score, debt-to-income ratio, and documentation requirements for refinancing.  Even if existing owners can refinance, loss of an earner or curtailment in hours may result in payments that still stretch them thin.

These affordability problems are not likely to abate any time soon.  Rents are back on the rise, and in many areas sharply. Incomes remain under pressure from high unemployment rates and an ongoing shift in the composition of jobs to lower paying work, where entry-level workers in many key occupations are priced out of affordably covering their housing costs. For example, two-thirds of households that include a retail worker in the lowest wage quartile for that occupation are severely cost burdened, along with seven in ten of those including a childcare worker in the lowest wage quartile for that occupation.

Meanwhile a golden moment is being missed to place people into homeownership at record low interest rates.  Additionally, home prices have fallen by about a third nationally, and by much more in many places. As a result, relative to renting, the cost of owning a home for first-time buyers has not been as favorable for at least 40 years, on average, nationally. But lenders are reluctant to lend, fearful of the impact of new regulations and that they will have to buy back poorly performing loans. As a result, many would-be homebuyers are missing a chance to lower their payments relative to today’s rents and also to lock in their mortgage costs with extraordinarily low fixed-rate loans.

Having so many Americans spend so much on housing is a concern not just for those affected. Housing cost burdens affect the national economy, leaving less to spend on other items and making it harder for Americans to save for the future.  As an example, families with children in the bottom quarter of spenders with housing and utility payments of more than half of total outlays spent a third as much on healthcare, half as much on clothes, and two thirds as much on both food and pension and insurance as those with housing outlays of less than 30 percent. In retirement, more will be entitled to programs like Medicaid, placing strains on social service systems.

Note: Low-Income families with children are those in the bottom expenditure quartile. Severely cost burdened households spend over half of all expenditures on housing; unburdened households spend less than 30 percent.   

Source: JCHS tabulations of the Bureau of Labor Statistics, Consumer Expenditure Survey.

Hemmed in by budget pressures and the enormity of the problem, our political leaders have done little to forestall or address growing housing affordability problems. Federal programs are costly and also have limited reach. Indeed, only about a quarter of all renters eligible for housing assistance (those earning half or less local area median incomes) receive it and there is essentially no comparable program to help struggling homeowners apart from a very small, temporary, emergency program put in place in 2010.

Still, some places at least, have found ways to reduce housing costs in their areas through regulations and land use policies that do not involve taxpayer subsidies or tax incentives.  These include some cities that are relaxing minimum unit-size requirements to encourage production of small micro-units of only a few hundred square feet.  Others with markets strong enough have been offering density bonuses to encourage set-asides of affordable housing units in new construction projects.  Yet most local governments continue to restrict residential densities.  Lenders, meanwhile, are so cautious after having so badly missed the mark with their lending standards that many who could lock in today’s low home prices and record low rates are unable to do so.

Americans will face daunting housing cost burdens that thwart savings and sap spending on non-housing items until: 1) lenders ease standards back to reasonable levels, 2) homebuilders are freed of barriers preventing them from building at greater densities, and 3) governments provide greater tax incentives or subsidies to close the gap for more low and moderate-income households between what they can afford and the costs of market-rate housing.


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