TheMReport — News and strategies for the evolving mortgage marketplace.
Issue link: http://digital.themreport.com/i/106030
feature ANALYTICS Or ig i nat ion The Fog Lifts: s e r v ic i ng A Clearer View for Housing Finance a na ly t ic s Fairer forecasts for lending are emerging as the nation's stormy economic environment stabilizes, but when will it be safe for the industry to trade cautiously optimistic measures for a progressively positive approach? By Tory Barringer Analysts from both Barclays and the FHA are asserting positive projections, and according to the former, housing policy is on track to transition "from being a source of negative headline risk to a potential positive factor for the housing stocks." Explaining the FHA's current stance, Stephen Kim and John Coyle noted that "anticipated policy changes have been less severe than feared." While part of the fiscal cliff tax bill limits itemized deductions in some cases (due to a provision known as the Pease Restriction), Barclays does not believe the scaling back will affect higher-end home purchasing behavior, thus leaving homebuilders relatively unscathed. "To begin with, the limitation also applies to deductions like charitable donations, so it is unclear how much any impact from the deduction limitation will affect homebuying activity versus giving to charities," the analysts write. "Moreover, mortgage rates are exceptionally low now, approximately 48 percent below their 20-year average of 6.46 percent. This means that the MID is theoretically less important now than in prior periods, since the benefit from locking in a lower mortgage rate will help offset the loss of the mortgage interest deduction." The bigger threat to homebuilders—FHA's commitment to reform its lending standards, fees, and scope in an effort to repair its financial situation—also appears to be less of a worry than first thought. So far, newly confirmed commissioner Carol Galante has committed to several major steps that were to be taken by the end of last month: the cessation of reverse mortgage origination, an increase for down payments on loans above $625,000, and the tightening of standards for borrowers with FICO scores below 620. Those reforms are merely "cosmetic" and shouldn't affect purchases very greatly, Barclays asserts. "For instance, reverse mortgages do not relate to home purchases; borrowers of loans more than $625,500 should easily manage a 5 percent down payment; and only 3.4 percent of FHA's recent loan volume went to borrowers with FICO scores below 620. Overall, we expect these changes to be incremental rather than transformative, and thus to have only a modest dampening effect on housing demand," Kim and Coyle write. However, should the agency take further steps to tighten standards—such as increasing The M Report | 63 se c on da r y m a r k e t W ith the fiscal cliff negotiation out of the way—at least, the first phase of it—the fog shrouding the nation's financial future is beginning to lift. As the haze surrounding the state of the mortgage interest tax deduction (MID) clears and the Federal Housing Administration (FHA) prepares to make reforms to its business model, leaders and economists in the real estate and mortgage industries are cautiously optimistic that the marketplace's forecast will grow more favorable.