Standard & Poor's Ratings Direct Service recently offered its projections for 2014, focusing specifically on housing-related sectors.
The projections include forecasts for the economy as a whole, housing price trajectories based on the S&P Case-Shiller Indices, interest rates and mortgage financing trends. Based on the assumption that different areas of the market will be affected by the housing and political landscape of 2014, the service's outlook focused on how housing-related sectors will fare and what changes are to be expected, Mortgage News Daily reported.
The outlook divided its projections into seven separate sections: banks, government-sponsored enterprises, the municipal housing industry, builders, mortgage insurers, mortgage servicing and mortgage originations.
Costs and adjustments
Banks are expected to continue looking for ways to cut costs, with interest rates figured to rise and overall mortgage activity potentially declining. Many larger institutions already began reducing staff sizes in 2013, while credit unions had varying levels of success in fielding customers while adhering to changing regulatory standards. S&P anticipates that most banks will continue to work their way through riskier loans, minimizing non-performing assets while lowering expenses for their servicers. Repurchase claims must be renegotiated with government-sponsored enterprises Fannie Mae and Freddie Mac, and as a result many institutions' reserve levels could end up shrinking in 2014.
With increased competition from other mortgage originators and less interest from investors, sales to the GSEs have declined – a trend that is likely to continue. But appreciating home values could provide a boon to bank business, enabling more homeowners to refinance and generally promoting renewed consumer confidence. More favorable sentiment regarding homeownership, as well as a shift back from a refinance to a purchase market, are among the S&P's expectations.
While the consensus prediction is that the GSEs themselves will be wound down and have their influence gradually diminished in 2014, the timing and specifics are still to be determined. For now, S&P's assumption is that Fannie and Freddie will continue trying to provide liquidity to the housing market while reducing their investment portfolios in the interest of a more sustainable future system.
While the ratings for affordable single-family housing options provided by housing finance agencies remain strong – 83 percent approval in 2013 – the S&P outlook expects reduced federal support for the municipal housing industry that could result in fluctuating levels of affordability. The two primary areas of concern are with the increased requirements for minimum down payments – already up from 3.5 percent to 5 percent on Federal Housing Authority loans – and funding for the U.S. Department of Housing and Urban Development. HUD funds were reduced by 12 percent in the past year, and if that trend continues, affordable single-family loans could be in short supply in the new year.
Building a more sustainable system
Homebuilders will play a key role within the market in 2014, following a year highlighted by rather volatile rates of price appreciation, climbing mortgage interest rates and a two-week government shutdown. With rising employment and increased demand from a new wave of homebuyers, new home construction is expected to be at a premium over the next 12 months. S&P anticipates that most builders will selectively use incentives to retain the increased average sales prices of the past year. The expectation – and hope throughout the housing industry – is that supply levels will improve and remain at a healthy level in 2014. However, permits must be granted at an increased pace for builders and credit metrics must strengthen across the board for borrowers to fill the demand void that marked much of 2013.
Mortgage insurers should return to profitability in the new year, thanks to increased insurance premiums and tightened underwriting standards that continue to figure to bolster profits. Mortgage servicers, meanwhile, are afforded a less certain outlook, having spent the bulk of 2013 focusing on compliance with recently implemented or soon-to-take-effect regulations from the Consumer Financial Protection Bureau. Some servicers are expected to begin originating their own loans, but even as portfolios run off and the playing field is expanded, these entities will experience increased operational risks and will need to place a continued emphasis on adding and training new staff, maintaining their systems and upholding compliance initiatives.
Mortgage origination volumes will be threatened if interest rates continue to rise, as expected, thanks in large part to the Federal Reserve's tapering of the Quantitative Easing program. S&P's forecast anticipates a renewed surge of jumbo lending in 2014 with more favorable economic conditions and no increase to conforming loan limits. All originators have invested time and resources in preparing for the new Qualified Mortgage eligibility rules, which take effect in January 2014. S&P predicted that non-agency securitization volume will reach nearly $40 billion in 2014, a 30 percent increase from the 2013 projection of $29 billion.