United States

Country Profile

The U.S. recession ended in 2010 and macroeconomic indicators show a slow recovery. Real GDP growth figures (constant prices) turned positive at 2.83 percent in 2010. Unemployment rates decreased to 8.2 percent in 2011 since their peak of 9.7 percent in 2010, and median nominal incomes stabilized in 2011. Real incomes decreased during the crisis by several percentage points.

Interestingly, while total population growth figures did not change much, the total number of households decreased as a result of the crisis as family members chose to delay household formation or existing households moved back in with parents or friends. The home-ownership rate decreased to 65.4 percent at the end of 2010, down from an all-time high of 69.2 percent in the second quarter of 2004 (HUD).

The U.S. housing and housing finance markets have been in a state of flux since the housing bubble burst in 2006. The housing market began to show signs of stabilization only in the last quarter of 2011. Sales of existing homes reached just over 4.5 million in early 2012, up from their lowest point of just below 3.5 million in mid-2010 (new series MBA), but still well below their peak of approximately 700,000 units in mid-2005. Sales of new one-family homes are still only a little more than 300,000 units per year (2/1/2012), a level not seen since early 1982, but this trend appears to have bottomed out. Annual house completions dropped from well over a million in 2008, to 794,400 in 2009 and 651,700 units in 2010 (HUD).

Median house prices have stabilized since 2010 in most markets after annual drops of 5 percent to 9 percent since the boom burst. And housing affordability is at an all-time high because of low house prices and record low interest rates (30-year fixed rate mortgages hovered around 4 percent Q1 2011). Yet many potential buyers face serious constraints in acquiring a mortgage. Close to one fifth of 2007 borrowers are delinquent or have defaulted and their impaired credit score will not allow them to get a mortgage. At the same time, the banks and the government agencies Fannie Mae and Freddie Mac have tightened their allowable loan-to-value ratios (2010 data show an average of 68 to 67 LTV ratios at origination) and increased the required credit score to qualify for a mortgage. As a consequence, FHA-VA /Ginnie Mae, the government guaranteed mortgage insurance and securitization system that allows for higher LTV ratios and lower credit scores for qualifying borrowers, has become the guarantor/securitizer of last resort with more than half the total mortgages purchased by Government Sponsored Enterprises in 2011, and is, therefore, exposed to a large proportion of the credit risk in the mortgage sector.

The size of the U.S. housing and mortgage-market at the end of 2011 is estimated as follows: The total value of the housing market is estimated at US$16.7 trillion; US$6.4 trillion in equity and US$10.3 trillion in mortgage debt. Of the US$10.3 trillion in debt, US$5.5 trillion is in GSE mortgage-backed securities, US$1.1 trillion is private label securities, US$2.9 trillion is in unsecuritized first lien mortgages in banks, savings institutions, and Fannie and Freddie portfolios, and the remainder US$.9 trillion is in unsecuritized second liens. FNMA is the largest player in the agency MBS market, with US$2.6 trillion, followed by Freddie Mac with US$1.6 trillion, and GNMA US$1.3 trillion. In 2011, the combined GSEs securitized more than 90 percent of all mortgages originated, up from approximately 35 percent in 2005 and 2006, and close to 10 percent was bank portfolio originations. The private label MBS market was still only at 0.1 percent of new originations, down from 40 percent in 2006 (Federal Reserve Q4 2011, FNMA, FreddieMac, GinnieMae).

The high level of properties with negative equity, and foreclosed properties in the process of sale, and the many mortgage loans in the process of foreclosure have prevented a normalization of the market. It is likely that these conditions will remain a constraint through 2012 and 2013. Various government programs have stimulated different ways to modify mortgages, but their success rate is low. A recent report^[1] by FNMA’s and Freddie Mac’s supervisor, Federal Housing Finance Agency, indicates that the two agencies might be able to reduce the outstanding principle of qualifying underwater mortgages.

The Dodd-Frank Financial Reform Act of 2010 will have profound effects on the U.S. housing and mortgage markets. First, mortgage lenders are prohibited from originating mortgages with predatory features. Second, the act requires banks and regulators to facilitate changes that would increase the use of mortgage bonds. Third, and heavily contested by the mortgage industry, the act requires a 5 percent risk retention by lenders on securitized non-GSE mortgage loans that do not fulfill strict quality requirements.

Qualified Residential Mortgages (QRM) for which no risk retention is needed have to comply to the following main requirements: a closed-end first lien mortgage on a one-to-four-family property in which the borrower resides; no other lien on the mortgage can exist at closing; a maximum maturity of 30 years; a maximum LTV of 80 percent for purchase loans, where the LTV must reflect the appraised value of the home if the price was higher than the appraised value; the down-payment can include gifts but no loans; a maximum front-end debt-to-income (DTI) of 28 percent and a maximum back-end DTI of 36 percent. Fewer than one third of GSE loans originated in 2009 would qualify as a QRM loan and far lower percentages for previous years.

The main outstanding policy decision is on the future of FNMA and FreddieMac. The January 2011 Obama Administration White Paper on the U.S. housing finance market only stated the need to wind down the GSEs and provided three nested options for a housing finance market without the GSEs.^[2]

[1] Federal Housing Finance Agency, "Addressing the Weak Housing Market: Is Principal Reduction the Answer?"

[2] Board of Governors of the Federal Reserve System, "The U.S. Housing Market: Current Conditions and Policy Considerations,” 

Photo Source: City of New York, Department of Transportation