Even if home prices and household leverage stabilize next year, mortgage debt outstanding will continue to contract over the next several years because of high credit losses, according to analysts at financial services firm Keefe, Bruyette & Woods.
“Given the high delinquency rates, large discounts in private label securities prices and large provisions already taken by banks, in our view it is clear that a meaningful percentage of loans will default and not be replaced by new loans as the homeownership rate continues to contract,” the analysts say. “This trend is likely to result in mortgage debt outstanding continuing to decline over the next several years.”
Mortgage debt, which reflects the unpaid principal balance of debt owed by borrowers, grew double digits from 2004 to 2006. But then the housing bubble popped, leading mortgage debt to decline 1% in 2008, 1.9% in 2009, 3% in 2010 and 1.9% through the first three quarters of 2011.
The dropping debt levels were due to tumbling home prices, decreased leverage and a falling homeownership rate, which historically all move in the reverse.
Analysts expect the negative trends to cause mortgage debt to decline 1 to 2% in 2012.
KBW analyst also said mortgage volume, because of slowing refinancing activity, will drive mortgage volume down 10% to $1.1 trillion in 2012 from $1.2 trillion in 2011.
Organic refinancing will wane in the first half of 2012 and be offset by a pick-up in mortgage volume stemming from the revised Home Affordable Refinance Program.
The Federal Housing Finance Agency is targeting about 1 million borrowers for HARP 2.0 through the end of 2013, which KBW analysts believe is a reasonable goal. This equates to about $150-200 billion of incremental origination volume, of which about $75 billion will flow through in 2012.
“As is the case in 2011, we believe 2012 volume will largely flow through the government-sponsored enterprise orFederal Housing Administration channels,” the analysts say.
The author of this article is: Justin T. Hilley
See the original post at: http://www.housingwire.com/2011/12/13/mortgage-debt-to-shrink-over-next-several-years-kbw
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