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60 | Th e M Rep o RT O r i g i nat i O n s e r v i c i n g a na ly t i c s s e c O n da r y m a r k e t SECONDARY MARKET LocaL edition Freddie mac: clearer Path ahead for Housing Job gains will make for more home formations. WASHINGTON, D.C. // After half a year of failed predictions and slow starts, the U.S. economy actually appears to be closing in on normal, at least according to Freddie Mac. Freddie's latest Economic and Housing Market Outlook shows that the agency expects to see the U.S. housing market driven once again by fundamen- tals—jobs, household formations, and affordability—rather than economic upheaval. Freddie is basing its optimism on a recent report from the Bureau of Economic Analysis that shows that the GDP grew at a rate of 4.0 percent in the second quarter, leading econo- mists at the company to calcu- late that the economy will grow an average of 3.3 percent in 2015. Household formations should increase, too. The Census Bureau reported that over the past four quarters, net household forma- tions totaled only 458,000, and not the 1.2 to 1.3 million per year predicted by the Joint Center for Housing Studies at Harvard. According to Freddie, slow household formation has re- sulted in a rise in the number of persons per household—which has increased by 2.6 percent since 2005 to 2.76 persons per household today. If persons-per- household had held steady over that period, there would be an additional 3 million households today, the report states. Nevertheless, Freddie expects household formations to pick up, and for housing starts to increase 28 percent (to 1.3 million starts) in 2015. If this happens, the report states, long-term inter- est rates will likely creep up, with 30-year fixed-rate mortgages reaching about 5 percent at the end of 2015. A recovering hous- ing sector will sustain the rally in homebuilding despite likely increases in long-term interest rates, according to Freddie. The biggest source of optimism for Freddie is the U.S. labor market. After several years of sluggishness, the U.S. has added 230,000 net new jobs on average for the first seven months of this year, Freddie reported. "The economic growth and la- bor market gains we saw in the second quarter of this year are projected to continue, strength- ening household formations and the housing sector," said Frank Nothaft, VP and chief economist at Freddie Mac. Nothaft also expects construc- tion activity to further accelerate the labor markets, and thereby fuel even more household formations and more housing demand. The result, he said, is an economy that is gradually heading back to the black. gse reform? not anytime soon the kbra feels that con- gressional laws are a hindrance to mortgage financing. WASHINGTON, D.C. // A new report issued by the Kroll Bond Rating Agency (KBRA) contends that GSE reform will not occur until at least 2016, and that lenders and investors should operate as if they do not expect a change in the current regulatory climate in the near term. Since the U.S. financial market collapsed in 2008, Congress and other policy makers have pushed for reform in Fannie Mae and Freddie Mac. Members of the Senate and the House of Representatives have propos- als on the table to eliminate the GSEs. In general, House members focus more on creating a "free enterprise" market by terminating government control of the mortgage finance sys- tem and creating competition, while Senate proposals center on private mortgage insurance and creating a single govern- ment entity through the Federal Mortgage Insurance Corporation (FMIC) to provide insurance for mortgage-backed securities that are qualified. KBRA believes that the differ- ences between the House and the Senate will prevent GSE reform from taking place in the fore- seeable future. The agency also stated they believe that changes that have been made since 2008 that had nothing to do with GSE reform have had a damaging ef- fect on the housing and financial markets, hindering their ability to rebound from the 2008 collapse. The report specifically high- lighted the passage of the Dodd- Frank Wall Street Reform Act by Congress in 2010, which was intended for consumer protection as an example of regulation that is impeding growth. The subse- quent creation of the powerful Consumer Financial Protection Bureau (CFPB) hit mortgage lend- ers and loan servicers hard with a flurry of regulations, nega- tively affecting the industry it was meant to protect. Analysts at KBRA stated in the study they believe the strict regulations put forth since 2010 have harmed housing finance and mortgage lending and that a better balance between consumer protection and credit "The important question is: how much further will prices and rents "The economic growth and labor market gains we saw in the second quarter of this year are projected to continue, strengthening household formations and the housing sector." —Frank Nothaft, Freddie Mac.