S&P's 2014 Projections for Housing-Related Sectors

Standard and Poor’s Ratings DirectrnService has made some projections for the coming year.  In addition to numerical forecasts for therneconomy as a whole, house prices as reflected by the S&P Case-ShillerrnIndices, interest rates, and mortgage financing, S&P says that each part ofrnthe market will be affected one way or another based on the housing, economic,rnand political landscape of 2014.  Withrnthis in mind they briefly discussed, in their U.S. Housing and Residential Mortgage Finance:  2013 Outlook some housing related sectorsrngoing into the new year and how the company views them from a ratingsrnperspective.</p

Banks: </p

Banks will continue cost-cutting asrninterest rates rise and mortgage activity moderates.  Some large institutions have already reduced staffrnand pipelines have shrunk.  S&Prnexpects banks will continue to work through risky loans, minimizing charge-offsrnand non-performing assets which will also lower expenses for their servicers.  They have also continued to negotiate withrnFreddie Mac and Fannie Mae (the GSEs) over repurchase claims which shouldrntranslate into smaller reserve levels going forward. </p

Sales to the GSEs has declined becausernof increased competition from other originators and less investor interest inrnlonger fixed-rate assets and rising rates will continue to shrinkrnprofitability.  On the upside, risingrnhome prices should enable some home owners to refinance and has turned consumerrnsentiment more favorable regarding home ownership.  S&P expects a shift from refinancing tornpurchasing but with less volume overall.  rnBanks will continue to put excess deposits into their loan portfoliosrnand will continue underwriting jumbo mortgages, particularly adjustable ratesrnones for their balance sheets.  Creditrnquality will continue to improve along with economic conditions and more stringentrnunderwriting.  </p

ThernGSEs</p

The future of Fannie Mae and Freddie Macrnis still under discussion but it is clear that both the administration andrnCongress intend to wind them down and this year lawmakers introduced concreternplans to do so.  Regardless of the timingrnor specifics of reducing the GSEs’ role, S&P believes the government willrncontinue to support their debt obligations and that they will continue tornremain profitable in near-term.  The GSEsrnwill continue to focus on providing liquidity to the housing market, whilernshrinking their investment portfolios and building the infrastructure of arnfuture housing finance market.</p

MunicipalrnHousing Industry:</b</p

Buyers took a step back in the firstrnhalf of 2013, giving the market time to absorb and re-adjust to the marketrndynamics. Home sales and price appreciation were slowed by a combination of<brapid price increases, higher mortgage rates, the government shutdown, andrnnormal seasonal patterns.  S&P viewsrnthe moderation as healthy given the previous pace of growth, particularly of homernprices and expects that homebuilders will still report strong revenue andrnearnings growth in 2013.  </p

S&P also expects supply and demandrnfundamentals to remain good through 2013 with rising employment and expandingrnhousehold formation supporting demand while low levels of constructionrnconstrain supply.  The recovery in homernbuilding, however is fragile and it could take an uneven trajectory.  S&P expects most builders to selectivelyrnuse incentives to retain last years increased average sales prices.  Revenue should be driven by new plannedrncommunity openings and EBITDA growth over the next 12 to 18 months but it creditrnmetrics will strengthen at a slower pace as builders borrow to meet growingrndemand and exhaust the large cash reserves that supported their ratings throughrnthe downturn.  </p

MortgagernInsurers</p

In the S%P’s view, 2014 should mark arnreturn to profitability for the mortgage insurance (MI) sector, barring anyrnmacroeconomic setbacks. While their legacy portfolios continued to contributernlosses in 2013, new notices of delinquency (NODs) are declining and claimsrnseverity is improving.  The ratio of newrnvintages and their contribution to profits should continue to increase and leadrnto lower losses and improved MI performance. rn</p

The regulatory changes underrnconsideration could be favorable for MIs. rnNegotiations with the GSEs on capital requirements could end the need tornoperate under capital waivers from state insurance regulators and they havernrecently finalized a Master Policy with the GSEs. </p

The increased insurance premiums andrnmore stringent underwriting requirements of the FHA have, in the rating service’srnview, allowed MIs to gain market share. At the same time, however, the GSEsrnhigher guarantee fees have effectively increased the price of mortgagerninsurance.  Several MIs recently reducedrnpremiums by 10%, which could help counter the guarantee fee increases. Whilernthe net effect of the changes for 2014 is uncertain, there could be somernstabilization in these market shifts. </p

The high credit quality of new insurancernand the improving housing market and economy should result in a profitable MIrnbusiness and near-term capital accumulation. rnThe recovery remains at risk and a new recession could reverse therndeclining trend of defaults and rising claims could prevent the MIs fromrnraising the capital necessary to write new business through a downturn.</p

MortgagernServicing:rn</p

Residential mortgage servicers werernfocused in 2013 on complying with existing regulations and implementing thernConsumer Financial Protection Bureau’s (CFPB) final servicing rules.  The new rules, which go into effect onrnJanuary 10 (many of which concern default management) apply to all servicersrnand, S&P says, provide the industry with clarity going forward.  </p

Residential servicers benefited from lowrnmortgage rates in the first half of 2013. rnThese led to refinancings of existing servicing portfolios, helping tornlower run-off and retain customers.  However,rnrising rates in the second half of the year led to lower refinancing volume andrnsome servicers reduced staff.   </p

Transfers of mortgage servicing rights</b(MSRs) continued in 2013, with many transfers going to nonbank servicers.  Because MSRs are no longer considered Tier Irncapital holding the MRSs would have required holding additional capital.   On thernpositive side, rising interest rates tend to raise the MSR values because theyrnare associated with lower prepayment speeds so servicers with large MSRrnportfolios could realize higher mark-to-market gains although at a diminishingrnrate.  Consolidation in the industryrncontinues as nonbank servicers acquire mortgage servicing operations.</p