Problems in mortgage lending go “well beyond subprime,” and the tightening of loan underwriting standards now underway is likely to push demand for homes down 15 percent and depress prices by 5 percent this year.
That’s the rather gloomy forecast by analysts who follow the stocks of major home builders for Banc of America Securities LLC.
In a report issued Tuesday, “Dissecting the Mortgage Distress,” BAS analysts said there’s already an excess supply of 800,000 existing homes on the market, and another 300,000 will soon be added to inventories through foreclosure.
But the biggest problem facing housing markets may be the tightening of credit that’s taking place as lenders put the brakes on risky loans including low-documentation and zero-down-payment mortgages, the report said.
“We expect loans with a combination of low FICO scores and high (loan-to-value ratios) will end or tighten with many buyers choosing to remain as renters,” wrote BAS analyst Daniel Oppenheim. BAS is a subsidiary of Bank of America Corp.
The mortgages most likely to disappear are those with loan-to-value ratios of 98 percent or more and with FICO scores of 680 or less. Those loans, which accounted for 12 percent of home purchases in 2006 and 77 percent of delinquencies, “likely won’t be seen again for some time,” Oppenheim predicted.
BAS analysts think that the problems in subprime lending could spread to “Alt-A” loans, meaning that loan-to-value ratios will be more critical than FICO scores. They also expect lenders will curtail the use of low- and no-documentation loans.
Nearly half of loans awarded in 2006 with FICO scores of 680 or less and loan-to-value ratios of 98 percent or more had no or limited documentation, “which is worrisome to say the least,” the report said.
“Overall, we expect that tighter lending standards will curb demand by 15 percent,” BAS analysts concluded. “Our assumptions … generally reflect our view that lenders will want to see more ‘skin in the game’ from borrowers and that the greatest tightening will take place on loans with little or no down payments.”
The problem of credit tightening will be especially acute in California, Nevada and Florida, the report predicted, because borrowers in those high-cost states were more dependent on loans requiring little or no down payment.
The report may even be underestimating the impacts of the tightening of credit under way, because it assumed lenders would still be willing to fund mortgages with 98 percent or higher loan-to-value ratios for borrowers with good credit. If all lenders stopped making zero- or near-zero-down loans altogether that could cut demand for housing by 22 percent.
The report said that with the existing-home supply above the 3 million mark, prices are likely to fall until inventory can be slashed by 800,000 units.
BAS expects home prices to fall by 5 percent in 2007. Coming on the heels of a 2 percent price decline in 2006, the 7 percent cumulative price drop would be the largest decline in home prices since the early 1980s.
Falling prices are likely to cause even more defaults and foreclosures, BAS analysts said.
“We do not anticipate that the mortgage credit issues are solely a result of the loan underwriting from ’06,” the report noted. “Rather, our view is that a primary driver of the problem is the decline in home prices, which leaves some households owing more on their mortgage than their home is worth.”
A First American CoreLogic Inc. study released Monday contained a similar finding, predicting that each 1 percent reduction in home prices will result in an additional 70,000 foreclosures.
The CoreLogic study, which predicted 1.1 million foreclosures in the next six to seven years among adjustable-rate mortgages originated between 2004-06, did not attempt to gauge the impacts of excess housing inventory. Neither the CoreLogic nor the Banc of America study attempted to factor in other variables that can affect foreclosure rates, such as unemployment and fraud.
The “hard landing” for the housing market will cause distress for many private home builders, Oppenheim predicted, which in the long run will slow the pace of new-home construction.
To eliminate the excess supply of existing homes, the report estimated single-family home construction would have to fall to 1 million homes per year for the next two years.
The U.S. Census Bureau and the Department of Housing and Urban Development announced Tuesday that the number of building permits issued for single-family homes in February fell 32.9 percent from a year ago, to an annual rate of 1.09 million.
Single-family housing starts for February were up 10.3 percent from January, however, to an annual rate of 1.22 million. Single-family housing completions in February were down 11.3 percent from January to 1.33 million.