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» TIGHT LENDING, FORECLOSURES TO PROMPT HOMEOWNERSHIP DECLINES The number of households owning homes fell 698,000 to 74,511,000 in the first quarter, the first decline in almost two years, according to the U.S. Census Bureau. At the same time, the nation's homeownership rate fell to 65 percent, its lowest level since the fourth quarter of 1995. With the homeownership rate already at its lowest point in more than 18 years, Capital Economics predicts further declines before a rebound occurs. The analytics firm forecast last July the homeownership rate would fall to a low of 64 percent, and the firm is sticking to that projection. The firm suggests the 64 percent low will come sometime "within a year or so," and when it does, the market will have about 9 million more renters and only 400,000 more homeowners than it did in 2004 when the homeownership rate peaked. In the first quarter of this year, the rate dropped 0.4 percentage points to 65 percent. While the peak of 69.2 percent in 2004 "never looked sustainable," according to Capital Economics, the current rate "is now as far below its trend level as it was above it in the boom." One of the major contributors to the ongoing decline in homeownership is the high level of foreclosures that continues to challenge the market. As of the end of 2012, the market held 1.9 million homes in foreclosure. While some of these loans might be cured, Capital Economics predicts at best, the result will be a 0.8 percentage point decline in the homeownership rate. In the first quarter of 2013, the greatest decline in homeownership took place among those between the ages of 35 and 44, which Capital Economics interprets as evidence foreclosures are a major source of the shift in owner and renter markets. Another factor contributing to the declining homeownership rate is tight lending standards. According to data from Ellie Mae, many lenders are demanding FICO scores of around 745, yet the average score is lower than 700. Relying on an average annual household formation of 1.2 million, Capital Economics calculates about two-thirds of new households will rent, resulting in an additional 0.3 percentage point drop in the homeownership rate over the next year. With a 0.3 percentage point drop resulting from tight lending standards and a 0.8 percentage point drop resulting from foreclosures, the homeownership rate is set to reach the 64 percent mark Capital Economics predicted sooner rather than later. VISIT US ONLINE @ DSNEWS.COM MOODY'S: HOME PRICES TO INCREASE, LOSS SEVERITIES TO REMAIN HIGH Home prices will increase over the next three years as the economy expands and servicers work through their distressed inventories, according to a report from Moody's Analytics. However, the firm predicts rising prices will not be enough to offset anticipated rising loss severities. Home prices will rise about 4.2 percent between the fourth quarter of 2013 and the fourth quarter of 2015, according to Moody's. "Not only will several years of solid job and household growth help home values by the end of this period, housing markets throughout the nation will have worked off most of the remaining distressed inventory," Moody's said in its report. Recent price gains have resulted from high affordability, soaring investor interest, and low inventories with declining foreclosure numbers playing a major role. Moody's predicts foreclosures will have less of a hold on home prices in years to come as "fundamentals that normally drive house prices" come back into play, including "job growth, demographics, affordability, and supply conditions." However, the transition from the current heavy foreclosure influence on prices will not happen overnight. Distressed and foreclosed homes "will still distort house price trends over the next year or two, but to a far lesser extent, particularly for the states with especially wild swings," Moody's said. States with lengthy foreclosure timelines will continue to be hindered by their foreclosure inventories, but the slow pace will prevent a flood on the market. Nationally, the market holds about 3 million homes in serious delinquency or foreclosure—which is about three times the normal level, according to Moody's. Foreclosures increased 12 percent year-overyear in February, RealtyTrac reported. However, Moody's points out a few states claim the lion's share of this increase—New York, New Jersey, Illinois, Ohio, and Florida. When these states are taken out of the equation, foreclosures declined 11 percent over the year. Outward economic factors will play positively on housing markets in the South and West, while the Northeast and Midwest will continue to struggle in the near future. Regardless of the overall price increases expected across the nation, Moody's expects residential mortgage-backed securities (RMBS) loss severities to remain elevated for the next year. Almost 40 percent of delinquent loans have been delinquent for three or more years, which translates to much greater losses than on loans in delinquency for shorter time periods. Aged delinquencies are more likely to encounter hiccups with titles, documentation, and judicial backlogs while expenses continue to accumulate. Bank of America and Chase hold high levels of delinquencies aged three years or more—46 percent and 43 percent, respectively—when compared to their counterparts, according to Moody's. Therefore, they "will generally realize higher loss severities than others," the ratings agency said. VERBOSITY "It is important to note that this recovery is being led by the private sector. Our businesses and entrepreneurs are doing what they do best. They are expanding, innovating, and hiring. And because of their determination, our economy is poised to shift into a higher gear. . . . [O]ne of the most significant speed bumps for growth is coming straight from Washington, where some political leaders continue to generate one manufactured crisis after the next. " —Treasury Secretary Jacob J. Lew at the City Club Of Cleveland 45

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