Summer optimism from several slightly positive market indicators are being dampening by recent mortgage default research by Fitch Ratings, Zillow and Standard & Poor’s. Tomorrow, RealtyTrac reports on September foreclosure filings. But for today this national outlook for housing into 2010 is a bitter pill to swallow - all on a day the Dow hits the 10,000 mark.
Fitch Ratings paints a gloomy picture for any improvement in residential mortgage performance at least in the near-term. Fitch estimates that approximately 60% of the remaining performing borrowers from 2006-2007 originations are underwater, reducing incentive for homeowners to stick around and repay upside down debt. Combine this with other financial difficulties, like unemployment, and the likely hood of default increases substantially.
Despite several recent indicators of very slight home price increases, Fitch projects over the next year a further home price decline of approximately 10% nationally. (At least that is more positive than Meredith Whitney’s prediction of housing price declines.) They predict that the downward price pressure will come from growing foreclosures with the end of foreclosure moratoriums and the release of properties by banks that did not qualify for a loan modification, to their inevitable fate. In the meantime the number of distressed borrowers has continued to grow.
A well-read article in the Wall Street Journal this week follows the same line of research as Fitch, but with special emphasis on foreclosures rising in the top end luxury markets. From the article:
About 30% of foreclosures in June involved homes in the top third of local housing values, up from 16% when the foreclosure crisis began three years ago, according to new data from real-estate Web site Zillow.com. The bottom one-third of housing markets, by home value, now account for 35% of foreclosures, down from 55% in 2006.Not to promote a bummer pile-on, but Standard & Poor’s agrees. The following from Research Recap:
Stan Humphries, chief economist for Zillow, says, “Rising foreclosures among more-expensive homes could create added pressure for a housing market that has shown signs of stabilizing in recent months as sales of lower-priced homes pick up.”
Default rates are particularly high and expected to rise on option adjustable-rate mortgages, which allow borrowers to make minimum payments that may not cover the interest due. Monthly payments can increase to sharply higher levels after five years or when the outstanding balance reaches a certain level. A study by Fitch Ratings found that 46% of option ARMs were 30 days past due last month, even though just 12% of such loans have reset to higher monthly payments.
Standard & Poor’s outlook assumptions for the U.S. residential mortgage market contribute to its view of loss expectations for archetypical prime mortgage pools, which it defines in a prior criteria article, Methodology And Assumptions For Rating U.S. RMBS Prime, Alternative-A, And Subprime Loans (free download),” published Sept. 10, 2009.Standard & Poor's Report: Criteria Structured Finance RMBS: Outlook Assumptions For The U.S. Residential Mortgage Market
Highlights of the outlook assumptions include:
We believe house prices could decline an additional 10% before hitting bottom around midyear 2010, for a total peak-to-trough correction of 35%-40%. However, we base our expected-loss case on a 30% market value decline, so if we were to rate new RMBS today, the expected price decline in our analysis more than covers the potential additional decline.
- Standard & Poor’s loss expectation for the archetypical prime RMBS pool, and the baseline credit enhancement level it associates with a ‘B’ rating for prime RMBS, is 0.50% of the original pool balance (assumptions for prime RMBS are the starting point for analyzing the other RMBS asset categories).
- Standard & Poor’s expects continued weakness in the U.S. residential mortgage market through mid-2010, followed by a period of stabilization and a slow subsequent recovery.
- Standard & Poor’s believes that under this market scenario, the market-value decline assumptions underlying the 0.50% credit enhancement level, which it outlined in its Sept. 10 criteria article, are appropriate.