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Th e M Rep o RT | 59 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 The laTesT strengthening employment, rising incomes Fuel Fannie mae's Positive economic Forecast housing demand is expected to rise as employment and incomes improve and lending standards ease. e conomic growth is expected to climb to 2.9 percent this year, up from 2.4 percent in 2014, according to Fannie Mae's February 2015 Monthly Economic Outlook. Fannie Mae predicts this economic growth will boost the sluggish housing market into recovery. "Our forecast calls for an increase in economic growth to 2.9 percent for 2015, which is a slight downward adjustment from our prior forecast but solid improvement nonetheless," Fannie Mae Chief Economist Doug Duncan said. The strengthening employment sector, declining commodity prices, and rising income prices are some reasons 2015 is set for a pickup, according to Fannie Mae's Economic & Strategic Research (ESR) Group. "Although we are begin- ning this year at a more modest pace compared to the above-trend numbers seen at mid-year 2014, the country's aggregate income has benefit- ted from the improving labor market, which, combined with low gasoline prices, should help drive higher auto sales and overall consumer spending throughout 2015," Duncan said. "Our forecast calls for a number of fac- tors, including strong hiring and income growth, stabi- lized housing affordability, and modestly easing lending standards, to translate into improving housing demand throughout the year." However, the strong U.S. dollar weighs on the trade deficit, which may slow some growth efforts. Despite possible shortfalls with the global economy and future limited interest rate hikes, Duncan said he feels positive the housing industry will begin to see gradual increases. "We continue to anticipate that the Fed will begin to hike short-term interest rates later this year, although weak global economic growth and geopolitical headwinds will likely limit the rise in long- term interest rates," he said. "We expect total home sales to increase by approximately 6.0 percent for 2015, with total single-family mortgage production climbing to approximately $1.2 trillion. Total single-family mortgage debt outstanding should be relatively flat this year before picking up gradually in 2016 and 2017." michael stegman stresses need for Housing reform in speech Stating that taxpayers remain vulnerable under the current model, Stegman calls for imminent housing finance reform and accelerated declines in GSe portfolios. t he U.S. Treasury's Counselor to the Secretary for Housing Finance Policy Michael Stegman stressed for comprehensive housing reform and shared his vision for GSE reform at the Goldman Sachs Third Annual Housing Conference last month. "I want to discuss the state of housing finance reform and the path we see to a more sustain- able mortgage finance system that meets President Obama's princi- ples and creates a housing finance system that will promote stability in the housing market and the broader economy, and therefore, benefits the American people," Stegman said in his speech. According to Stegman, under the current system, taxpayers remain at risk and the gov- ernment has yet to provide a long-term plan for the housing market. Under conservatorship, GSE senior employees can reap substantial profits while leaving taxpayers the burden of covering the enormous losses. This model can only be changed by law. "The American people deserve better," he said. "They deserve an efficient, sustainable, housing finance system that serves bor- rowers effectively and efficiently without leaving taxpayers on the hook for potential future bailouts." The speech marks the first time the Obama administration has publically announced steps it thinks the Federal Housing Finance Agency (FHFA) should take to regulate Fannie Mae and Freddie Mac in the absence of legislation reform. Fannie and Freddie were taken over by the government in 2008, eventually requiring nearly $188 billion in bailout money. Stegman noted the GSEs have made progress so far. Between 1995 and 2008, the GSEs retained investment portfolios financed at a combined $1.6 trillion. The portfolios have been almost halved since entering conser- vatorship and are required to shrink to less than $500 billion in total by the end of 2018. Stegman outlined a number of steps the administration would like to see the GSEs take while waiting for legislations. The GSEs have large mortgage investment portfolios, which Stegman would like to see shed more quickly. "Despite asset sales and natural run-off, their retained portfolios remain substantial at over $400 billion each and still constitute a significant line of business," he said. "The size and complexity of the retained portfolios also necessitate active hedging, introducing considerable basis risk and earnings volatility and making the GSEs susceptible to potentially relying on a future draw of PSPA capital support." Stegman ended his speech by once again urging for compre- hensive legislation reform in housing finance, stressing the change needed is urgent and no more time can be wasted. "When the next crisis hits, it is unlikely that we will have the ben- efit of advance warning, and at that point, it will be too late for thought- ful reform," he said. "Our options will be limited, our hands will be tied, and we will be destined to relive the mistakes of the past."

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