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M A R K E T O U T L O O K CELIA CHEN, PHD SENIOR DIRECTOR Moody's Analytics The housing market has finally found its path upward from its long deep slide and will be in full swing by late next year. Home sales, housing starts, and house prices are all marching forward, although the pace of activity remains weaker than normal. Significantly, the correction has helped set the stage for a sustained recovery. The imbalances that contributed to the downturn—overvalued house prices and too much homebuilding—have been eliminated. If anything, the correction has resulted in undervalued housing, and the excess supply of homes is rapidly dwindling. Months of supply of existing homes are down to 6 months, while the supply of new homes has fallen to 4.6 months, indicating a tight new-home market. These two forces will boost housing demand and supply in the coming year despite anticipated slowing in economic growth in the first half of 2013. Low mortgage interest rates, pent-up demand for housing, and increasing confidence that the housing recovery is here to stay will offset the weaker job growth expected to result from the fiscal cliff. Investor demand will also help drive up home sales through 2013. Sales of new and existing homes are expected to rise from 5 million this year to 5.7 million next year. Homebuilding will pick up even more strongly, although off an admittedly low base. Housing starts will rise from 780,000 units to 1.1 million. House prices will remain the laggard, dipping slightly for a quarter or two before hitting a sustained and solid pace of appreciation in the second half of next year. The main weight on house prices is the large stock of distressed homes. About 3.5 million homes are in late-stage delinquency or in the foreclosure process. The number of distressed 50 homes has declined since peaking at 4.5 million in 2010, but remains high. Mortgage servicers are slowly working through these homes, and their release onto the market as discounted distressed sales will place downward pressure on house prices. Pointing to a more positive future, mortgage credit quality on the other side of the mountain of distressed homes is good. Tighter underwriting standards on these loans have resulted in 30- and 60-day mortgage delinquencies that are back down to their prerecession rates. On the whole, house prices will advance 1.9 percent this year and 1 percent next year. Stronger price gains and home sales mean that mortgage purchase originations will pick up as well, from $417 billion this year to $492 billion next year. Refi originations, however, will decline by 45 percent as fewer borrowers can profitably refinance. Additionally, refinancing through the federal government's 2.0 version of the Home Affordable Refinance Program will be winding down. The housing market recovery has gained its legs and in 2013 will take another step in the right direction. Celia Chen is Moody's resident housing economist. She manages the Moody's Analytics regional house price forecast models, develops proprietary housing market indicators, writes extensively about housing issues, and has participated in numerous consulting projects on econometric modeling of house price forecasts and mortgage lending. M A R K E T O U T L O O K ROBERT H. HOSCH JR. SENIOR PARTNER Butler & Hosch, P.A. LLC The mortgage servicing industry—especially the default side of the business—has undergone tremendous change, almost seismic shifts in the last three years. While the focus of this column is about what is in store for our industry in 2013, we cannot do so without reflecting on the last three years. In my opinion, mortgage servicers, have been working diligently for the last three years to build new infrastructure and have identified ways to fine tune the short sale and home retention processes. This infrastructure includes more focus and resources around short sales and workout agreements as well as foreclosure filings. In 2013, we will see that infrastructure start to move some of the industry's shadow inventory through the default pipeline. Servicing organizations will respond by forming new partnerships with local counsel in states with the largest shadow inventories. The intent is to come up with new methods of expediting the foreclosure process after other options are exhausted. With that come additional opportunities and new unforeseen challenges. On the regulatory side, post-election the new world order in Washington will move the powers that be to an honest debate and then rule on new regulations that will affect how the default industry looks in the future. Organizations like the USFN, regional Mortgage Bankers Associations, ALFN, and local law firms will continue to work with state legislatures to educate and help local governing bodies make the best decisions for homeowners and the industry on a state-bystate basis. On the legal side, as the shadow inventory makes its way through the foreclosure liquidation process, the defense bar will file more challenges testing both the new and old regulations. These challenges will shape the legal landscape and determine what servicers, their legal representatives, and the courts can do in regards to homeowners in default. The partnerships between servicers and local law firms that are in step with the court systems will ensure due diligence while making the foreclosure process more efficient. Irrespective of what 2013 will bring to our sector of the mortgage servicing industry, one thing is certain: there is no going back to the old days of servicing. This is a time for leadership—leadership that engages in an honest and sometimes direct discussion as to where we have been, where we are, and where we are going as an industry. For the last 23 years, Robert H. Hosch Jr. has focused on the legal issues facing the mortgage banking servicing industry. He is currently partnering with local parties, courts, and agencies to identify how best to handle the state of Florida's volume of residential mortgage foreclosures. S E R V I C I N G JIM MCDONALD FOUNDER AND CEO McDonald Computer Corporation The mortgage industry remains unpredictable, with both lenders and servicers under the microscope to update their operations and uphold compliance. At this juncture, no one can be certain what the future holds for the servicing industry, however, over the next 10 years, I feel we will see mortgage companies returning to local servicing.

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