MBA testifies on state of the housing market before Senate committee
Jay Brinkmann, chief economist and senior vice president of research and economics for the Mortgage Bankers Association (MBA), testified today before the Senate Committee on Banking, Housing and Urban Affairs at a hearing titled, "The State of the Nation's Housing Market." Below is Mr. Brinkmann's oral statement to the committee, as prepared for delivery. "Good morning. I am Emile J. Brinkmann, chief economist of the Mortgage Bankers Association.
Whenever I am asked when the housing market will recover, I explain that the economy and the housing market are inextricably linked. The number of people receiving paychecks will drive the demand for houses and apartments and the recovery will begin when unemployment stops rising. Since September 2008, we have lost 5.8 million jobs in the US, more than five times the number the previous year. Job losses of this magnitude put incredible strains on all of our systems, especially housing.
What is different about this recession is that we entered it with an already weakened housing market. In past recessions, it was unemployment that increased delinquencies and weakened the housing market. Prior to the onset of this recession, the housing market was already weakened due in part to the heavy use of loans like pay option ARMs and stated income loans by borrowers for whom these loans were not designed. Together with rampant fraud by some borrowers buying multiple properties and speculating on continued price increases, this led to very high levels of construction to meet that increased demand, demand that turned out to be unsustainable. When that demand disappeared, a large number of houses were stranded without potential buyers. The resulting imbalance in supply and demand drove prices down, particularly in the most overbuilt markets like California, Florida, Arizona, and Nevada - markets that had previously seen some of the nation's largest price increases.
Thus the nature of the problem has shifted. A year ago, subprime ARM loans accounted for 36 percent of foreclosures started, the largest share of any loan type despite being only 6 percent of the loans outstanding. Now prime fixed-rate loans represent the largest share of foreclosures initiated. Perhaps more significantly, almost 40 percent of all prime fixed-rate foreclosures are in the states of California, Florida, Arizona and Nevada. So even though those four states consistently have about two-thirds of foreclosures involving pay option ARMs and stated income ARMs, they now also have a disproportionate share of the prime fixed-rate problem.
It is difficult to overstate the degree to which those four states continue to drive the national mortgage delinquency numbers. The national quarterly foreclosure rate reported by the MBA for the second quarter of this year was 1.36 percent. However, in the four states I mentioned, it was 2.34 percent, roughly 10 times the rate we saw in those states during the boom years. Without those four states, the national foreclosure rate would be about 1.04 percent, roughly double the rate we saw for the rest of the country during the boom years.
Unfortunately, the consensus is that unemployment will continue to get worse through the middle of next year before it slowly begins to improve. While we have seen certain good signs like a stabilization of home prices and millions of borrowers refinancing into lower rates, we still face major challenges.
The most immediate challenge is what will happen to interest rates when the Federal Reserve terminates its program for purchasing Fannie Mae and Freddie Mac mortgage-backed securities in March. The Federal Reserve has purchased the vast majority of MBS issued by these two companies this year and in September purchased more than 100% of the Fannie and Freddie MBS issued that month. The benefit has been that mortgage rates have been held lower than what they otherwise would have been without the purchase program, but there is growing concern over where rates may go once the Federal Reserve stops buying and what this will mean for borrowers. While the most benign estimates are for increases in the range of 20 to 30 basis points, some estimates of the potential increase in rates are several times those amounts. The extension of the Fed's MBS purchase program to March gives the Obama administration time to announce its interim and, perhaps, long-term recommendations for Fannie and Freddie in February's budget release.
All of this, however, points to the need to begin replacing Fannie Mae and Freddie Mac with a long-term solution. MBA has been working on this problem for over a year now and recently released its plan for rebuilding the secondary market for mortgages.
MBA's plan envisions a system composed of private, non-government credit guarantor entities that would insure mortgage loans against default and securitize those mortgages for sale to investors. These entities would be well-capitalized and regulated, and would be restricted to insuring only a core set of the safest types of mortgages, and would only be allowed to hold de minimus portfolios. The resulting securities would, in turn, have a federal guarantee that would allow them to trade similar to the way Ginnie Mae securities trade today. The guarantee would not be free. The entities would pay a risk-based fee for the guarantee, with the fees building up an insurance fund that would operate similar to the bank deposit insurance fund. Any credit losses would be borne first by private equity in the entities and any risk-sharing arrangements put in place with lenders and private mortgage insurance companies. In the event one of these entities failed, the insurance fund would cover the losses. Only if the insurance fund were exhausted, would the government need to intervene.
We believe this proposal represents an important improvement over the present structure in a number of areas and we are eager to discuss it further with the members of this committee as well as other proposals detailed in the written testimony. Thank you."
For more information, visit MortgageBankers.org.
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