One on One: Subprime Solutions May Contribute to Housing Rebound
August 14, 2011 | 9:36 pm CDT

By Mike Wilson

Jerry Howard, CEO and Executive Vice President of the National Association of Home Builders, talks about about the possibility of government action sparking a residential construction rebound.

"NAHB's forecast continues to show a bottom for the housing cycle in 2008, followed by a gradual recovery process that will lift home sales and housing production back toward the demographically based trend over a period of several years," says Jerry Howard, CEO and Executive Vice President of the NAHB.

Credit quality problems in the subprime mortgage sector have created a host of headaches for companies with a stake in the home building industry. Foreclosure activity was up 75 percent in 2007 from 2006, with more than 2.2 million filings on more than 1.3 million properties, according to a release from RealtyTrac, an online marketplace for foreclosure properties.

The current credit climate has started a “stampede to quality” for lenders, making it difficult for potential buyers to secure mortgages for homes, says Jerry Howard, CEO and Executive Vice President of the National Association of Home Builders. The credit crunch is also driving up new housing costs because companies involved in residential construction are finding it harder to obtain financing, which in turn is worsening the slump, he says.

This tight housing market has prompted government action, including a recent plan by the Bush administration to stem the tide of foreclosures through an interest-rate freeze for qualifying subprime borrowers. ISWonline recently caught up with Howard to talk about the possibility of government action sparking a housing rebound, and to discuss the general outlook for companies that rely on residential construction for business.

ISWonline: How would you describe the current, general business climate for companies with a stake in the U.S. home building industry?

Jerry Howard: The downturn in residential construction has hurt companies involved in homebuilding. To some extent they have been able to offset the negative impact by concentrating on the remodeling market, which has held up reasonably well. Other companies have been able to take advantage of increased activity in nonresidential construction.

ISWonline: How have the subprime mortgage crisis and resulting foreclosures contributed to the current market conditions for builders? Are they a major factor behind the slowdowns some builders are experiencing?

Howard: Revelations of deep credit quality problems in the U.S. subprime mortgage sector have served as triggers for successive flights to quality in the credit markets, and the global investment community now imagines serious credit risk around virtually any corner not guarded by government guarantees.

The stampede to quality has shut down or seriously crippled major components of securities markets — not only subprime, Alt-A and jumbo mortgage securities markets in the U.S., but also asset-backed commercial paper markets and interbank markets for short-term funds in the U.S. and abroad.

There has been tightening of lending standards not just in the subprime mortgage market, but in the prime and Alt-A markets as well. As a result, potential home buyers who might easily have qualified for a mortgage in more normal times are either being rejected outright or being asked to come up with down payments of 20 percent or more (as high as 30 percent in some cases). In many of these cases, potential home buyers are unable to secure an acceptable mortgage, contributing to weak demand for housing.

The subprime-induced tightening of credit conditions in home mortgage markets now is being joined by tightening in credit markets where builders and developers raise funds — the markets for land acquisition, land development and construction loans (AD&C). This drives up the cost of building for home builders, making housing less affordable.

ISWonline: How does the Bush administration’s recently announced plan to aid subprime borrowers aim to stem the tide of foreclosures?

Howard: The plan focuses on mortgage borrowers who have the greatest likelihood of experiencing payment difficulties – those with adjustable rate subprime loans where monthly payments will shift from a relatively low introductory teaser rate to a much higher, fully indexed rate after only a brief period. Large numbers of such loans were made in the last few years, producing a huge wave of rate resets that is just now breaking.

The Federal Deposit Insurance Corp. estimates that 1.7 million subprime ARMs will reset in 2008 and 2009 (with the majority of rate hikes occurring this year). Many of these homeowners are expected to have difficulty in handling the new higher payment. The goal of the rate freeze initiative is to provide temporary payment relief to borrowers to give them more time (five years) to refinance their mortgage or sell their house. The program establishes a fast-track approach so large numbers of cases can be processed in a systematic and efficient manner. Other loans will also be eligible for restructuring, but on a case-by-case basis.

ISWonline: Does the Bush plan have the potential to help enough struggling homeowners to significantly slow nationwide foreclosure rates, or do you think more government action needs to take place?

Howard: The Hope Now Alliance, which is the coalition of private mortgage lenders, servicers and investors that are carrying out the administration’s rate freeze plan, estimates that 1.2 million borrowers will be eligible for the program. With the criteria and restrictions that have been established for this voluntary program, however, the actual number of rate freezes is likely to be much smaller. Still, even if the number is only a quarter of the estimated potential, the program would make a meaningful difference in holding down the inventory of unsold homes and easing downward pressure on home prices.

Treasury Secretary Paulson recently suggested that the mortgage industry consider greatly expanding this program to reach a larger number of troubled borrowers, including some with prime mortgages. NAHB supports that suggestion. In addition, we are anxious for Congress to finish work on FHA revitalization legislation, which will enable more borrowers to find a stable alternative to subprime financing; move legislation to reform the regulation of Fannie Mae, Freddie Mac and the Federal Home Loan Banks, which includes higher mortgage limits for Fannie and Freddie; and, to enact temporary revisions to states’ authorities to issue mortgage revenue bonds in order to better employ that resource to help resolve mortgage financing problems.

ISWonline: If the administration’s plan accomplishes its goal of slowing the subprime crisis, could it help spark a rebound for the building industry?

Howard: One of the factors contributing to weak housing demand has been falling house prices in some markets. Potential buyers have remained on the sidelines waiting for prices to stabilize before buying. If the administration’s plan accomplishes its goal of slowing the subprime crisis, it would definitely contribute towards stabilizing house prices. That factor alone would bring many potential home buyers back into the market, bolstering weak demand — a necessary condition for a rebound in residential construction.

ISWonline: Do you see the industry experiencing a rebound in 2008? If so, what do you currently see that indicates the possibility of a recovery, and when do you think this could happen?

Howard: NAHB’s forecast continues to show a bottom for the housing cycle in 2008, followed by a gradual recovery process that will lift home sales and housing production back toward the demographically based trend over a period of several years.

Our forecast anticipates a trough for home sales in the first quarter of 2008 and a bottom for housing starts around mid-year.

ISWonline: What segments within the industry do you think will provide builders growth opportunities in the coming year?

Howard: The remodeling market will continue to provide one of the better opportunities in the industry. From a geographical perspective, areas with strong employment growth, such as the Northwest U.S. (Oregon and Washington) and parts of the south (i.e., Texas and the Carolinas), will continue to see healthy housing markets.

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