Mortgage Monday: Mortgage 2011, continued

Mortgage 2011

4. Homebuyers return in greater numbers. The gentle improvement in the employment market, still-low interest rates and what should be gradually easier lending conditions seem likely to foster a stronger housing market.

Whether we see easier lending conditions depends on the Freddie Mac and Fannie Mae reform. A resurrection of the secondary markets and whether consumers can find an appetite for mortgage products that banks prefer to put in their own portfolios. Without a competitive private market, the restrictive standards put in place by the GSE’s over the last couple of years will continue to be the only game in town and will continue to limit access to the cheapest mortgage credit.

5. The distressed real estate market improves. Recently, there was slight improvement in the number of “underwater” homes that occurred not because of any gains in home prices, but rather because a rise in foreclosures produced a final “cure” that loan modifications did not.

The loans written in 2008 to 2010 and the new ones to come in 2011 are certainly subject to economic tides, but they are underwritten far better than those from 2004 to 2007 which are still being pushed out of the system. Loan failures from fundamentally flawed loans are fading behind us.

6. A soft demise of the Home Affordable Modification Program. The goal of saving 3 million to 4 million homeowners from foreclosure by 2012 was wildly optimistic. By the end of the program we may not make even half that number.

7. Mortgage rates remain favorable. This means from a historical perspective. Barring a new widespread economic crisis, it’s increasingly unlikely that we will challenge the lows for mortgage rates seen in 2010. Borrowers will once again have to get used to rates in the low- and mid-5% range for 30-year fixed ¬†loans. Much of the year should still continue to feature rates that rank among the lowest seen in a generation or more. The low mortgage rates of 2010 came as a result of multiple financial panics and investor fears of more losses.

8. The Federal Reserve’s Quantitative Easing 2 program ends. Initiated in November of 2010, the Fed’s program of purchasing Treasury Securities in hopes of fostering lower interest rates has had the opposite effect. This is partly due to the expectation that the Fed’s move will further spur economic growth in 2010 and the improving economy.

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