An even gloomier scenario may be in store for an already ailing US housing market if the overall economy slips into a recession, according to UBS Securities analysts.Falling home prices, soaring foreclosures at a time of tighter lending and rising unemployment are all weighing heavily on an already troubled housing sector, the analysts said during a conference call late on Wednesday.
“The housing market has been in a recession for the past year and once the overall economy slips into a recession, which it probably will, the housing market will probably be in a depression,” said Tom Zimmerman, head of ABS, mortgage research at UBS Securities.
Lack of funding is the biggest problem facing the housing market right now, according to the analysts, with subprime and Alt-A securitized markets shutting down and banks being forced to cut their mortgage lending dramatically due to capital constraints. So-called Alt-A loans are made to borrowers with less than prime credit ratings but who are above subprime.
“The housing market, in terms of housing finance, is really in a disaster situation right now and I see no change in that very quickly,” said Zimmerman. “That's why our view of the housing market is very bleak and probably will remain that way for some time until there's some government intervention."
Fannie Mae and Freddie Mac have also cut back their lending to stressed subprime and Alt-A borrowers with low incomes and high loan-to-value ratios.
“Freddie and Fannie are capital-constrained. They are battling their own problems so they are not a source of funding for people losing their homes today,” said Zimmerman. “The only game in town is FHA right now, but they're having their own problems too.”
Home prices, which had been falling at a reasonable pace over recent years, have accelerated since late last year.
“We were declining at an annualized rate of about 5% to 6% but prices starting dropping very rapidly and we're now at a 20% annualized rate. That's the mode we're in right now,” he said.
Foreclosures, which have been building over recent months as borrowers default on risky subprime home loans, are not expected to peak until late 2008 to mid-2009.
“It's kind of interesting that this subprime disaster that started a year or so ago just keeps spreading, spreading and spreading,” said Zimmerman. He noted how securities backed by home equity lines of credit, or HELOCs, have moved to the forefront amid surging defaults.
As more and more homeowners slip into negative amortization situations, HELOCs will continue to erode, the analysts said.
“Certain banks own enormous numbers of these things (HELOCs) and certain monolines wrapped them. You never know where this crisis is going to go next,” said Zimmerman.
Monolines, or bond insurers, with the largest exposure to HELOCs include Ambac, FGIC, FSA, MBIA, according to UBS.
The firm expects losses generated by exposure to securitized HELOCs to reach 18% for 2006 vintages and 32% for 2007 securities.
According to UBS, 62% of HELOC securities are owned by commercial banks, 16% by savings institutions, 9% by credit unions and 8% by finance firms. ABS issuers own a smaller 5%. (Reuters)