Signs of life are emerging in the mortgage securities market and home building as late payments and credit standards are beginning to ease, according to the Federal Reserve. Even the commercial mortgage market, which remains in the doldrums, has exhibited some signs of improvement.
The outlook was outlined in the minutes of the Federal Open Market Committee meeting on Jan. 24 and Jan. 25.
Mortgage rates and current-coupon agency residential mortgage-backed securities have fallen to near historic lows. Yet, refinance activity remains subdued as a result of “extremely tight” mortgage underwriting standards and low levels of home equity.
However, some reports indicate credit standards have started to loosen.
The Fed acknowledged slowly improving delinquency rates but noted that defaults still stand higher than pre-crisis levels.
One positive sign was an increase in subprime RMBS based on the ABX index. The improvement was consistent with other higher-risk fixed-income securities.
“RMBS prices were supported by reports of the sale of a significant portion of the RMBS held in the Maiden Lane II portfolio,” the Fed said of its mortgage bond holdings acquired from American International Group at the height of the financial crisis.
Treasury and agency MBS holdings by the Fed stand at around $2.6 trillion, and the Fed plans to maintain its “Operation Twist” policy of reinvesting principal repayment from agency debt, agency MBS and Treasury securities.
The Fed highlighted reports that some homebuilders have seen non-bank lenders provide financing as land prices edged higher.
In addition, some success is being seen from the expansion of the Home Affordable Refinance Program.
Underwriting standards, which still remain tight, combined with a large inventory of real-estate-owned assets and uncertainty about future home prices have subdued an improvement in the housing market during recent months.
New single-family starts and permits were higher during the last two months of 2011, though they were barely higher than last year’s depressed levels.
In the commercial real estate sector, issuance of commercial mortgage-backed securities was “very light” during the fourth quarter. In addition, delinquency on CRE loans remains high, while CRE price indices are substantially lower than their 2007 peaks.
But activity in the commercial mortgage market wasn’t entirely bad.
“Responses to the January Senior Loan Officer Opinion Survey on Bank Lending Practices indicated that bank CRE lending standards continued to be extraordinarily tight, but some banks reported having reduced the spreads of loan rates over their cost of funds (compared with a year ago) for the first time since 2007,” the minutes stated.
However, the Fed acknowledged that CRE delinquency is still elevated, and CRE price indices continued to hover at levels substantially lower than their 2007 peaks.
