We're only two days away from 2009 – and what can we expect in the coming year? This week, MortgageOrb speaks with Thomas J. Healy, senior managing director of Insight Capital Partners in Fort Lauderdale, Fla., on what we can expect in 2009.
Q: What do you see for the U.S. economy in 2009?
Healy: I am concerned about the US economy in 2009 for two major reasons. First, the correction in real estate values was inevitable and irreversible, regardless of the sums of relief dollars that the government is throwing at it. Real estate values in many areas had reached a 2005 peak of eight to nine times median income. This was not sustainable. A more reasonable ratio would be two to three times.Â
In today's more sane credit environment, required debt-to-income ratios and loan-to-values will result in a return to these more reasonable multiples. Since income is unlikely to increase in the short run, real estate values must continue to drop.
Second, the drop in real estate values has not yet fully worked its way through the economy. There is a growing belief among mortgagors that it does not make sense to make payments on a mortgage that is under water. A huge percentage of loans originated since 2004 are, in fact, under water.
Many of these loans are in foreclosure (or going through a short sale), which can take 18 months in some states. We will not see these properties hit the real estate market for a while. These will have the effect of further exacerbating the drop in real estate values, resulting in yet more foreclosures.
Compounding this are the increasing unemployment figures, lack of home equity borrowing to stimulate spending, the precipitous drop in the stock market and faltering foreign economies (e.g., China). I think that we will not see the bottom until early 2010.
Q: In terms of economic policy, what do you expect to see from Congress and the White House during 2009?
Healy: I expect that Congress will continue to focus on simplistic solutions to complex problems. Encouraging servicers to be more aggressive with loan modifications, for example. Such legislation ignores the following realities:
- The servicers do not own the loans (investors are now suing Countrywide for stepping up loan modifications);
- Servicers operate in a high transaction volume/low profit margin business. With a per loan annual profit of around $100 they cannot afford the high labor cost that is associated with loan modifications;
- More than half of all loan modifications to date have gone back into default.
Congress will be unable to staunch the drop in real estate values and, thus, mortgage defaults. The pain in the economy can best be ameliorated by encouraging job growth.Â This seems to be a mainstay of the new administration's economic policy.
Q: Where do you see Fannie Mae and Freddie Mac in 2009?
Healy: Regardless of how much TARP funds are given to banks, they will not invest it in home mortgages. Banks learned quite well in the seventies that they do not want to hold 30-year fixed rate mortgages (the product of choice among mortgagors today) on their books. They will only originate them if they can sell them.
Unfortunately, the secondary market for these loans is essentially nonexistent beyond the government-sponsored enterprises (GSEs). The GSEs will continue to have a dominant role in mortgage origination through 2009.Â
The GSEs, however, are wrestling with appropriate credit guidelines for today's economic conditions. Deteriorating loan-to-value ratios and credit scores will seriously impede the amount of product that these agencies can prudently buy.
Q: Do you see the covered bond market gaining traction in the U.S. during this coming year?
Healy: Covered bonds, collateralized by mortgages, will start to gain traction in the U.S. However, if this market takes shape in 2009, it will probably be in the second half of the year.Â
The market for mortgage-backed securities (MBS) has been severely shaken by a lack of faith in credit agency ratings and the fact that the originators have no ‘skin in the game.’ The latter is addressed by covered bonds. Credit agency credibility can only be restored with the passage of time and, possibly, a change in how they get compensated.Â
Q: What will it take to get international investors interested in the U.S. MBS market again?
Healy: Trust is a hard thing to earn. The international markets have been shaken to the core by our current meltdown. This will only be exacerbated if we begin to change – through judicial or legislative fiat – the existing terms of investor contracts (e.g., cram-downs).Â
We need to show the world that we will honor existing contracts; strengthen the veracity of credit agency ratings, demonstrate that the original lenders continue to have ‘skin in the game,’ document borrower essentials such as income and employments, avoid experimental underwriting, and get back to the five C's of credit (credit, character, capacity, collateral and capital).