|Volume 12, Issue 1, 2012||Federal Reserve Bank of Dallas|
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Texas Housing and Mortgage Update
The mortgage crisis precipitated a long-lasting economic recession and sent millions of American homeowners into foreclosure. Now, as retail sales, consumer confidence and employment show encouraging progress almost three years after the recession’s end, the housing market is slowly gaining some momentum.
During 2011, mortgage loan performance significantly improved in West Coast areas, but the recovery in some other areas lagged behind. For example, the Northeast still has large number of serious delinquencies in the foreclosure pipeline. Figure 1 shows first-lien mortgage performance by county in the U.S. in December 2011, based on Lender Processing Services (LPS) data.
Mortgage troubles have not been as deep in Texas as in many other states, and the foreclosure inventory has been lower than the national level since 2007. In December 2011, about 2.8 percent of all mortgages serviced in Texas were more than 90 days past due. The foreclosure rate as a percentage of total mortgages serviced was 1.3 percent, 2.3 percentage points lower than for the nation as a whole.
Texas’ mortgage loan default rate remained almost the same from December 2010 to December 2011, with a slight increase in loans more than 90 days past due (0.07 percentage points) and slight decreases in loans 30 days and 60 days past due (0.02 and 0.06 percentage points, respectively) (Figure 2). As in previous years, 30-day and 60-day delinquency rates in Texas were substantially higher than in the nation, though serious delinquency and foreclosure rates were much lower. Texas borrowers who missed one or two mortgage payments were often able to catch up later to avoid foreclosure.
The recent $25 billion mortgage servicing settlement changes the mortgage servicing standards of participating banks and could provide mortgage relief to hundreds of thousands of distressed borrowers. The settlement will provide loan modifications with a lower interest payment or principle reduction, enable current but underwater borrowers to refinance and offer payments to borrowers who lost their homes to foreclosure. The settlement and other home-retention programs may lead to a decrease in the number of foreclosures and delinquencies in the coming year.
The number of loans serviced in Texas has declined by about 22,000 from fourth quarter 2010 to fourth quarter 2011, according to the Mortgage Bankers Association’s National Delinquency Survey. The majority of loans serviced were still conventional prime loans (60 percent), down slightly from 62 percent in fourth quarter 2010 (Figure 3). The share of Federal Housing Administration (FHA) loans increased 1 percentage point and stayed around one-fifth of all loans serviced. The share of conventional subprime loans and VA loans (backed by the U.S. Department of Veterans Affairs) were about 11 percent and 6 percent, respectively.
Originations of subprime loans are gradually declining, and the impact of delinquencies of these loans on overall mortgage performance has diminished. With the default rate of conventional prime loans going down, the rather unchanging share of “seriously delinquent mortgages” is likely attributable to an uptick in defaults of FHA loans in Texas (Figure 4). The down payment needed for these government-insured loans can be as low as 3.5 percent, and the credit-score requirements are typically more lenient than for conventional loans.
Texas’ mortgage performance has not deteriorated in general, but the state still has scattered hot spots of serious delinquencies. Variation in loan performance across the state is more evident when the geography is broken down into ZIP codes, as in Figure 5.
Table 1 shows the volume and rate of delinquent mortgages in the top 30 Texas counties in terms of number of loans serviced. For example, the four counties in the Dallas–Fort Worth area—Dallas, Tarrant, Collin and Denton—had over 32,000 seriously delinquent first-lien mortgages in December 2011, about 1,800 more than the same month the year before, according to the LPS database. The serious delinquencies and foreclosures in nearby counties such as Kaufman, Ellis and Johnson also stayed relatively high at more than 5 percent.
Factors Influencing Housing Supply
Excessive inventory of distressed sales has been one reason for the housing market’s sluggish recovery. Despite the shrinking pipelines for foreclosures, about 15.2 percent of homes on the market in Texas were still short sales, foreclosures or real estate-owned (REO) properties in December 2011, according to MarketPulse by CoreLogic Inc. These distressed sales are likely to make nondistressed homes harder to sell without price discounts and may push home values further down. Figure 6 shows home price movements over the past nine years for Texas and the nation as a whole. Home prices in Texas did not appreciate as wildly as they did in many other parts of the nation before 2006, but they still slumped during the recession, mainly due to the deterioration of economic conditions.
In 2011, home prices fell in most parts of Texas. In December 2011, the major metros (except Austin–Round Rock) experienced home depreciation (Figure 7).
Borrowers with negative equity may not be able, or willing, to sell their homes at a loss. Some may default on their mortgages if they are not able to sustain payments or refinance. According to the CoreLogic report, about 10 percent of Texas home sales in December 2011 had negative equity. That’s a far lower share than the nation’s 22 percent. More than half of the homes in the Phoenix–Mesa–Glendale (Arizona) and Orlando–Kissimmee–Sanford (Florida) core-based statistical areas (CBSAs) had negative equity, compared with 11 percent in Dallas–Plano–Irving and 10 percent in Houston–Sugar Land–Baytown.
The market is adjusting as home values decline. Home listings dropped 17 percent from December 2010 to December 2011, and the total housing inventory fell from eight months a year ago to about six and half months in January 2012, approaching the six-month level that is considered healthy, according to the Multiple Listing Service. Home sales turned higher and residential housing permits began trending upward in 2011 (Figure 8).
Factors Influencing Housing Demand
Jobs and incomes are fundamental in determining housing demand. The unemployment rate has been lower in Texas than the nation but remained high at 7.4 percent in December 2011 (Figure 9). However, the Texas economy has been resilient and has seen broad-based growth at a modest and consistent pace coming out of the recession. In particular, the strong energy sector, exports and the low cost of living have attracted domestic and international migration over the last decade. Texas had the largest population growth of any state between 2000 and 2010 and added 200,000 jobs in 2011, more than any other state. An increasing workforce boosts housing demand.
The composition of the national workforce has changed, with many older workers postponing retirement and fewer younger people having a job or actively looking for one (Table 2). The overall labor force participation rate is falling in general, particularly for younger generations. The trend is projected to continue and has implications for structural change in housing needs.
For example, individuals starting career and family later may delay home purchases. Many individuals and families who move to Texas for jobs choose to buy homes in close proximity to work and social circles. Families with children still prefer to buy in good school districts. Households moving from more dense areas may retain a taste for urban living.
Homebuyers have become more aware of risks associated with home investment and the type of housing they need as a result of the recent mortgage crisis. Housing has become more a choice of lifestyle and less an investment, according to a study by the Real Estate Center at Texas A&M University.
The mortgage financing environment is another critical factor that influences housing demand. Mortgage rates have been historically low, and home prices have declined for years. However, underwriting criteria have been more restrictive than they were prerecession. Concerned about future costs in servicing loans in delinquency, many lenders continued to tighten credit standards. Only recently did they start to slightly ease standards on prime loans (Figure 10). This poses challenges for buyers—especially first-time homebuyers and those with impaired credit or lost income—who are trying to obtain mortgages and take advantage of low mortgage rates and home prices.
The demand for mortgage financing has also decreased in response to the stringent credit environment. According to LPS data, only about 47,821 mortgage loans were originated in 2011 in Texas, an almost 65 percent drop from the peak in 2006, when 136,086 mortgage loans were made.
Housing finance reform aims to reduce market reliance on government-backed mortgage securitization. Loan originations in the conventional market using Fannie Mae and Freddie Mac’s conforming loan guidelines are no longer dominant. Based on the national Campbell/Inside Mortgage Finance Survey of Real Estate Market Conditions, cash financing has recently become the No. 1 homebuyer financing method, with FHA second and Fannie/Freddie third. In Texas, FHA loans are still the most popular financing method, accounting for about 30 percent of transactions, with cash financing catching up and Fannie and Freddie declining.
The underwriting standard for FHA insurance is relatively lenient compared with conventional loans; however, because lenders have in general tightened underwriting criteria, the needed FICO credit score for even FHA-approved borrowers has increased to around 700, and the standard for refinancing has exceeded that for purchases (Figure 11). This suggests that borrowers with troubled mortgages are unlikely to qualify for refinancing at a lower interest rate.
Challenges and uncertainties are still ahead for the housing and mortgage markets. Large inventories of distressed sales have prevented the rebound of home prices. Structural changes taking place in the workforce will affect future housing needs. Both consumers and the industry have learned from the crisis and become more cautious about their decisions. Homebuyers now tend to choose housing more for functionality and affordability, and lenders are only making loans that have low default risks. The demand shifts may influence construction jobs and the growth of housing-related sectors.
However, the restrictive credit environment has recently shown signs of easing. Financial reform is moving forward with more emphasis on consumer and investor protection. New regulations have been designed to help more troubled borrowers modify loans and reduce monthly mortgage payments. In Texas, housing demand is increasing as the job market improves. Inventories are going down, and the market has adjusted, showing an increase in housing permit issuance. The economy’s recovery will quicken the absorption of distressed inventories and reduce downward pressure on home values. The housing market is heading for a gradual but solid recovery.
Community Development Analyst Emily Ryder provided research assistance.
e-Perspectives, Volume 12, Issue 1, 2012