Keeping Them In Their Homes
by Eileen B. Fitzpatrick
June 8, 2007
Economic news early this year has been consistently downbeat. GDP growth
stalled in the first quarter, as a widening trade deficit and a sharp inventory
correction compounded the housing sector woes. Several indicators, however,
point towards a modest turnaround. First, the May jobs report came in strong at
157,000 new jobs created. Second, even as gas prices topped $3 a gallon,
consumer spending has proceeded unabated. Furthermore, gas prices still show
little sign of seeping into general inflation rates—the Fed’s preferred measure
of core inflation slowed to a 2 percent increase over year-ago, the slowest
pace since 2002. Encouragingly, consumers appear optimistic about the future,
as captured in the May increase in consumer sentiment.
Continued resilience in the broader economy can provide much-needed
support for the housing sector. A return of GDP growth to trend levels (at or
above a 3 percent annual rate) later this year should bolster jobs and incomes,
ultimately supporting housing demand. The housing outlook remains fragile,
though, and the recovery will be an uneven one. Troubles are worst in the
subprime market, where 1 in 13 homes are candidates for foreclosure. According
to the National Delinquency Survey, in the second half of 2003, approximately
670,000 homes entered foreclosures, 37 percent of which were subprime. This
year we project that over a million homes will enter foreclosure (a 30 percent
increase from 2006) and 60 percent of these homes will be subprime. These
troubles appear to be having little to no direct spillover into the prime
mortgage market, however. According to the Fed’s most recent Senior Loan
Officer Survey, while a considerable number of institutions tightened their
lending standards on nontraditional and subprime mortgages, credit standards
for prime mortgages have remained basically unchanged.
A reciprocal relationship exists between house prices and subprime
delinquencies. When prices rise rapidly, financially stretched borrowers can
easily refinance into mortgages with lower rates, often withdrawing cash from
home equity in the process. This helps maintain consumer spending and liquidity
for the household. Unfortunately, this works in reverse as well. Lately, with
prices weak or falling in many markets, troubled borrowers have fewer
opportunities to lower their mortgage rate and access home equity through
refinancings. This appears to be contributing to rising subprime foreclosures,
inflating the already bloated inventories of unsold homes—and, completing the
cycle, further depressing home prices. According new Conventional Mortgage Home
Price Index-Purchase series, the Midwest states of Illinois, Indiana, Ohio, and
Michigan experienced a 4.3 percent decline in home values in the first quarter
of this year, the largest decline of any region in the country. Not
coincidentally, these states also have the highest exposure to subprime
delinquencies.
While it is difficult to find good news in the subprime market, one
recent development holds out some hope of helping keep people in their homes.
Lenders reportedly have stepped up efforts to provide loan modifications and
forbearance alternatives that would make mortgage payments more affordable, and
Federal bank regulators have encouraged such efforts. One sticking point,
however, has been the legal difficulty modifying subprime loans in securitized
pools.
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Freddie Mac has taken the lead in the prime market in efforts to help
keep financially strapped borrowers in their home. Freddie Mac’s initiatives
include tougher subprime lending standards, the introduction of new 30-year and
adjustable rate subprime mortgages with reduced margins and lower fixed rate
periods, and consumer education campaigns. While not every subprime mortgage
will avoid foreclosure, experience has shown that these efforts can go a long
way in helping homeowners keep their homes.
MEDIA CONTACT:
Eileen B. Fitzpatricl
703.903.2446
eileen_Fitzpatrick@freddiemac.com