1. Consumer Finance Protection Bureau - The structure to promote what may be sweeping overhaul of mortgage products, processes and disclosures should be put in place by July 21, 2011. Elizabeth Warren, charged with creating the structure of the new Bureau, is expected to have much of the framework in place for the new regulatory body by the “official” July start date. By that time, a new director will have been named and regulators and regulations drawn from other bodies will be assembled. 2. Fannie Mae and Freddie Mac Will Change – Reforming the Government-Sponsored Enterprises (GSE) has been an on-again, off-again, on-again crusade for the last couple of administrations. To be sure, it’s a love-hate relationship; the GSEs have totally distorted the mortgage market, but without them, there would be no mortgage market to distort. They have eaten tens of billions of taxpayer funds, but remain perhaps the key support for millions of homebuyers and homeowners. In such a fragile market, making immediate, substantial changes could have many unwelcome consequences. Reforming these entities is a thorny issue, to be sure. 3. The Economy Improve Will Improve - If you want to know what will happen to mortgage rates in 2011, watch what happens to the economy. Federal Reserve stimulus and the recent tax agreement seem likely to ensure that growth continues on an upward track in 2011. The labor market recovery should continue to gain momentum as the year progresses, but unemployment could remain stubbornly high for perhaps years to come. As the economy finds firmer footing, so will mortgage rates. After reaching a 56-plus-year lows in 2010 by various crises, deflation concerns and government manipulation, we may just see a bit of the other side of the coin in 2011. Although the Fed will keep short term interest rates low, they are unlikely to want to leave them at emergency levels forever. As we begin 2011, mortgage rates have moved off recent bottoms, but have probably overshot where they should actually be, given current economic condition. 4. Homebuyers Return in Greater Numbers - We’ll stop short of calling 2011 “the year of the homebuyer,” but the gentle improvement in the labor market, still-low interest rates and what should be gradually easier lending conditions seem to us likely to foster a stronger housing market. Whether we see easier lending conditions depends upon Fannie and Freddie reform, a resurrection of private secondary markets and whether or not consumers find an appetite for mortgage products that banks prefer to put in their own portfolios and can exercise full underwriting control over, such as ARMs. Few banks want to hold sizable portfolios of low-yielding, long-term fixed-rate mortgages, and so the vast majority of those are sold to Fannie and Freddie and are thus beholden to their standards. With only one private offering of a new Mortgage-Backed Security in 2010 — a “best of the best” package of loans early in the year — and financial market reforms still being digested, it does seem unlikely that we’ll see a huge swing away from tight underwriting standards, but could see some nibbling around the edges. This perhaps may come in the form of some flexibilities in borrower employment histories, for example. 5. The ”Distressed” Real Estate Market Improves - Recently, there was a 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. It makes a curious headline, indeed: “Underwater Crisis Solved by Foreclosure Crisis”, but this does seem to continue to be a resolution for at least some underwater loans in 2011. The combination of an increase in the use of principal forgiveness in modifications and FHA “Short Refinances” in 2011, coupled with resumption in the stream of foreclosures, should ultimately render fewer loans delinquent and fewer homes underwater and the headline figures should begin to improve as the year progresses. Loans written in 2008-2010 and the new ones to come in 2011 are certainly subject to economic tides, but they are underwritten far better than those from 2004-2007, which are still being wrung out of the system. More recent delinquencies and failures have been economically driven, and probably are more curable as hiring resumes and household finances improve. To be sure, the improvements here will be gradual, but real. 6. Mortgage Rates Remain Favourable - Of course, we mean this from a historical perspective. Barring a new economic crisis of widespread proportions, it’s increasingly unlikely that we will challenge the 56-plus-year lows for mortgage rates seen in 2010. Borrowers will again have to become accustomed to rates in the low- and mid-five-percent range for 30-year fixed rates. Still, much of the year should continue to feature rates that rank among the best seen in a generation or more, even if they don’t test new record low levels. The low mortgage rates of 2010 came as a result of multiple financial panics and investor fears of more losses, and to wish for their return is to hope for renewed economic catastrophe. For our part, we’ll take low- and mid-five percent rates in a growing economy over four percent rates in a collapse any day. 7. The Federal Reserve’s Quantitative Easing II (QEII) Program Ends - Initiated in November 2010, the Fed’s program of purchasing Treasury Securities in hopes of fostering lower interest rates has had the exact opposite effect, and interest rates have risen measurably off their panic-level bottoms. This is partly due to an improving economy and partly due to the expectation that the Fed’s moves will further spur economic growth in 2011. Instead of a mechanism to lower interest rates, we’ve come to believe that the Fed is instead using the program as a way to buffer the market, keeping market interest rates from rising more quickly than the Fed would like. Source: HSH Associates, Financial Publishers
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