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new home completions gaining more slowly, for-sale inventories may remain tight and vacancies low next year. But the biggest move coming in 2014 will occur as the single-family mortgage market begins transitioning from a rate-and-term Primary Credit Analyst refinance dominated market, to the first STANDARD & POOR'S purchase-dominated market we've seen since RATINGS SERVICES 2000. The emerging purchase market will gather momentum in the coming year. What will some of the other market features for 2014 look like? Here's what we're projecting: As regulations continue to evolve, residential The 30-year fixed-rate mortgage will end the mortgage servicers are adapting. year close to 5 percent, as they gradually climb higher –and of course we're likely to see more U.S. residential mortgage servicers have volatility each time the "Taper Talk" heightens. faced numerous challenges during the last Rising rates will dampen affordability, but few years. For example, in February 2012, five even at 5 percent, most markets around the servicers entered into an agreement with the country will be affordable for the typical family Department of Justice and 49 states' attormaking the median income. Many high-cost neys general to provide various forms of loss markets already have challenges with affordabiliSteven L. Frie's commentary, "As Regulations Continue mitigation relief to their borrower base, with a to Evolve, Residential Mortgage Servicers Are Adapting" ty, and will feel a greater pinch. We project better separate monitor overseeing compliance. (November 14, 2013), reproduced with permission of Standard job creation in 2014 will lead to income growth to & Poor's Financial Services, LLC. But arguably the biggest challenge, which offset some of the lessened affordability. affects all servicers, is adapting to the ConHousing starts rise to about 1.15 million sumer Financial Protection Bureau's (CFPB) MARKET OUTLOOK homes in 2014. This is good news that has the final servicing rules, which are effective Janupotential to create 700,000 jobs. ary 10, 2014. These rules apply to all aspects of Home sales will increase at a more moderloan servicing, including default management. ate pace, around 5 percent. During our ongoing discussions with Home values will also moderate from their senior managers when conducting onsite 10-12 percent increase in 2013 to around 5-6 reviews, servicers we rank have indicated VP and Chief Economist percent annualized for 2014. that they expect to be in full compliance FREDDIE MAC Multifamily rental properties will continue with these rules on or before January 2014. to be an attractive investment option, supAlthough some changes in the new rules ported by relatively low vacancies and graduwere relatively straightforward, most required ally rising rental cash flow. strong coordination and cooperation between In summary, the big transition in the these firms' various internal (training, quality industry will be the move to a purchase-domThe mortgage industry's big move in 2014 will control, audit, and IT) and external (technolbe the transition to the first purchase-dominated inated market. We expect purchase-money ogy providers and other vendors) resources. lending to be up about 15 percent in 2014 comAs with any new or revised servicing rules, market we've seen since 2000. pared with 2013, and even more so come 2015. we expect the regulatory process to continue As we look forward to 2014, we see reasons At Freddie Mac, Frank Nothaft is responto evolve as companies fully implement the to be optimistic about the economy. Led by a sible for forecasts, research, and analysis of the new rules and the CFPB begins to monitor resurgent housing sector, 2014 will shape up to macroeconomy, housing, and mortgage markets. compliance through the examination process. be better than 2013, with consensus forecasts He has served as Freddie Mac's chief economist For example, on September 13, 2013, the placing economic growth in the 2.5 to 3.0 persince 2001. Before joining the GSE in 1988, he CFPB issued rules clarifying certain mortcent range, more than a 0.5 percentage point was an economist with the Federal Reserve Board gage servicing standards based on comments better than is forecast for 2013. A quickening from servicers and other industry participants. in the recovery pace will also lead to more job of Governors. As servicers become more familiar with the creation and will push the unemployment rate new standards, we expect that CFPB will below 7 percent, perhaps by mid-2014. likely issue further clarifications. We expect single-family home sales and "In order to become truly successful, we The compliance environment for residential housing starts to be at the highest level since must return to the business of encouragmortgage servicing has changed dramatically 2007, and multifamily transactions and coning homeownership . . . that of preservover the last few years, and we believe that struction to post gains as well. Despite rising the servicing industry will likely continue to mortgage rates and continued property-value ing and promoting one of the greatest be a focus of both federal and state regulaappreciation, housing will remain generally freedoms we have as a nation." tion. Although much of the focus over the last affordable in most parts of the country. With several years has been on defaults—and we household formations expected to pick up and —Ed Delgado, The Five Star Institute MARKET OUTLOOK Steven L. Frie Shifts in Servicing believe this is an important consideration in any review regardless of market conditions— we think regulators may examine other areas of servicing even more deeply based on changes to guidelines or regulatory findings. For example, Fannie Mae and Freddie Mac recently issued new guidelines on lender-placed insurance. As the CFPB and other entities continue to implement and refine regulations, we believe servicers may need to continue to adapt promptly. We believe doing so will help them serve their customers better while remaining in compliance with applicable guidelines, thus avoiding potential penalties and damage to their business reputations. Steven L. Frie is a director in servicer evaluations for Standard & Poor's Ratings Services. His primary responsibilities entail performing onsite reviews of mainly residential and some assetbacked servicers, with subsequent production of an analysis and ranking of the entities' operations. Frank E. Nothaft From Refi to Purchase 48

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