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HUD PROVIDES HOUSING RECOVERY IS SUSTAINABLE, ACCORDING TO DETAILS FOR NEXT DISTRESSED MARKET ANALYSTS Despite a number of potentially damaging headwinds, the ongoing housing recovery will remain sustainable for the foreseeable future, analysts for Capital Economics say in a recently released report. The housing industry's rapid rebound took many experts by surprise—even the researchers who authored the Capital Economics report admit they "have been slightly taken aback" by the recovery's speed. However, they point to several major indicators that show the current upturn is more than a temporary blip or a false recovery. Sustained rises in demand, home prices, homebuilding activity, and new and existinghome sales all demonstrate that the market is seeing a lasting recovery, they say. They also forecast further price growth of 5 percent in each of 2013 and 2014. What's more, even as prices rise, valuation and affordability—"the cornerstone on which the improvement in housing is being built"— remain very favorable. The major threats to the market at this juncture, the analysts contend, are the potential for a new U.S. recession (brought on by complications from the fiscal cliff and the possibility of a partial euro-zone break-up) and the risk that properties in the shadow inventory will flood the market and drive prices down. As far as the economy is concerned, Capital Economics' working assumption is that Washington will avoid throwing the country into another downturn. Beyond that, the firm notes that trade links between the United States and Europe are relatively small, and the financial links aren't significant enough to tip the country back into recession should the euro-zone see problems. Turning to the shadow inventory, analysts estimate that the backlog of homes at risk of coming onto the market may be as large as 3.8 million (1.5 times the number of properties actually for sale). If those homes were allowed on the market too rapidly, supply would balloon and disrupt the price recovery—but Capital Economics' analysts don't expect that to happen. "The signing of the $25 billion foreclosure settlement has not led to a wave of foreclosures hitting the market," the economists write. "With foreclosure timelines still protracted, and banks wary of the effects that a glut of supply would have on the recovery, we anticipate a continued trickle of homes from the shadow inventory, rather than a flood." 10 Of bigger concern is the recovery's dependence on investors and cash buyers. According to Capital Economics, "Mortgagedependent buyers have made next to no contribution to the improvement in housing market demand," mostly because of tight credit. Instead, it's been buyers and investors—who are less dependent on mortgage finance—that have driven much of the recovery so far. The problem, though, is that investment buying won't last when discounts start fading. According to data from Zillow, the availability of deeply discounted foreclosures has been dropping sharply in states targeted by investment buyers. While the trickle of properties from the shadow inventory will keep some bargains on the market, cheap, high-yielding homes are disappearing. In fact, the analysts note, some of the most popular investment cities—such as Phoenix— are quickly becoming "no-go" areas for institutional buyers as the local markets recover. Even though the number of "overheating" cities is fairly small, there is a lesson to take away from those markets. "What should be clear from all this is that the housing recovery cannot be driven by investors indefinitely," the report says. "The very recovery that investors are driving will eventually price them out of the market." In order to keep the market healthy, credit conditions must loosen so the current heightened demand can actually make an impact, according to Capital Economics. According to a recent survey released by the Federal Reserve, one of the biggest factors keeping today's credit market tight is the risk of put-back requests from Fannie Mae and Freddie Mac. However, as the economy shows improvement and mortgage delinquencies continue to fall, Capital Economics anticipates put-back risk will fade. "All in all, if we are right that the economy will continue growing, it's reasonable to expect lenders to loosen the reins somewhat. The upshot is that we think mortgage-dependent buyers will gradually play an increasing role in the housing market recovery," Capital Economics says in its report. "The bottom line is that the U.S. housing recovery is sustainable. The key point is that the fundamentals of housing valuations and affordability are very favorable, reflecting a market that has adjusted." ASSET SALE HUD's next sale as part of the Distressed Asset Stabilization Program (DASP) will include even more loans. The agency announced it will put out about 10,000 to 15,000 loans in its next sale, scheduled for the first quarter of 2013. The most recent sale in September included about 9,000 loans. Through the program, seriously delinquent loans insured by the Federal Housing Administration (FHA) are sold in a bidding process. The program was introduced with a two-fold purpose. "This program accomplishes two very important objectives—it supports communities hardest hit by the housing crisis and it saves considerable money for FHA's insurance fund," said Carol Galante, FHA's acting commissioner. "The results from the September sales were strong, which tells us investors of all stripes and communities are eager for this solution." Over the next year, HUD expects to sell at least 40,000 distressed loans, mostly through quarterly sales. According to a release from the federal agency, the results of the most recent sale "yielded an estimate of an additional $1 billion in economic value to FHA's Mutual Mortgage Insurance Fund in fiscal year 2013 alone by significantly reducing the expected severity of losses on loans sold through the program." The September sale involved two phases. The first part included 5,300 non-performing loans in six different national pools for a combined unpaid principal balance of $950 million. The second part consisted of 4,100 loans in seven different Neighborhood Stabilization Outcome (NSO) pools, amounting to $770 million in unpaid principal balance. The next sale will also include targeted NSO pools, which will be located in select metropolitan areas of Georgia, California, Florida, and Ohio. The NSO pools are a new element of DASP and include sale terms to promote stability in hard-hit communities. For example, NSO pools require that no more than half of the loans within a purchased pool be marketed as REOs. If a foreclosure can't be averted, another neighborhood stabilizing outcome must be sought, such as holding the property as a rental for at least three years.

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