Posts by Frank E. Nothaft
Frank E. Nothaft is Freddie Mac’s chief economist. Nothaft is responsible for forecasts, research and analysis of the macroeconomy, housing and mortgage markets. He is also involved in affordable lending analysis and policy issues affecting the housing finance industry.
Recent data show that consumers generally are shedding debt – and lowering or paying down their mortgages is just another way they’re doing it. Between 2007 and the fourth quarter of 2010, mortgage debt declined more than $400 billion, according to the Federal Reserve Board.
With mortgage rates in the four percent range (the likes of which haven’t been seen in more than 50 years), many borrowers have refinanced their mortgages.
The housing crisis this country has experienced over the past four years has been the worst since the Great Depression. That comes as no surprise to most Americans; as home prices fell, the country saw a vigorous debate about the crisis, and about the laws and regulations that have emerged to help prevent another one from happening.
What is surprising is how often the debate here characterizes boom-bust cycles in housing prices as though they are uniquely American. They aren't.
As in the past, key macroeconomic drivers of the economy – such as income growth, unemployment rate, and inflation – will affect the performance of the housing and mortgage markets in 2011. With fiscal policy supporting aggregate demand for goods and services and an accommodative monetary policy providing low interest rates and ample liquidity to capital markets, the economic recovery should accelerate gradually over the year, with the second half of 2011 exhibiting more growth and job creation than the early part of the year.
With that as the macroeconomic backdrop, these forces will support a gradual recovery in the housing and mortgage markets. Here are five features that will likely characterize the 2011 housing and mortgage markets.
The U.S. is in the early stage of an economic expansion that began at the end of 2009 or the start of this year. As is sometimes the case in the initial phase of a recovery, there are mixed messages from economic indicators on the overall health of the macroeconomy and of the housing market. GDP growth surged late last year, but slowed in the second quarter. Similarly, job market growth turned positive last winter but appears to have lost momentum. The choppy pattern of economic recovery is not unusual and will likely continue throughout this year, with clearer signs of expansion eluding us before next year.
Still, there are a number of positives in the housing market. For one, declines in home sales, construction, and house prices have slowed or stopped – and have even rebounded in some metropolitan markets. This recovery has been supported, in part, by the low interest rate policy of the Federal Reserve and the active involvement of Freddie Mac, Fannie Mae and Ginnie Mae to assure that an adequate supply of funds is available to meet the mortgage credit needs of America's families. Mortgage rates on loans ineligible for pooling into their securities, such as "jumbo" loans, carry fixed-rates that are nearly a full percentage point above the rates on "conforming" loans.
A recent survey by the Mortgage Bankers Association (MBA) showed that nearly one in seven American households with a mortgage was delinquent at yearend, meaning they'd missed at least one payment or were in foreclosure proceedings. Moreover, the MBA's fourth quarter 2009 National Delinquency Survey reported that the percentage of seriously delinquent loans (at least 90 days past due or in foreclosure) and the number of loans in foreclosure are at the highest levels recorded in the 40-plus-year history of the survey. The non-seasonally adjusted (NSA) seriously delinquent rate for all mortgages outstanding – which is our primary delinquency metric at Freddie Mac – climbed nearly a full percentage point to 9.7 percent at the end of the fourth quarter.
Compared with the third quarter, the NSA serious delinquency rate increased for all loan types. Not surprisingly, subprime adjustable-rate mortgages had the highest delinquency rates, as these loans dominated subprime origination activity at the height of the boom and carried more high-risk features. More than 40 percent of subprime borrowers with adjustable loans were seriously delinquent at yearend – more than eight times the rate for prime borrowers with conventional fixed-rate loans.