The second half of 2010 will be a time of stabilization or a “renewed leg down” in housing, and it all depends on how aggressively the industry can rein in the swell of foreclosures, according to a new study from the research team at Credit Suisse.

“We estimate that roughly 3.2 million foreclosures must be prevented in 2010 for home prices to stabilize or potentially tick up,” the institution’s analysts wrote in their report. The researchers called the feat an “uphill challenge,” with a very narrow path for success carved out by government programs.

The administration has promised that its federal modification program will help three to four million homeowners avoid foreclosure, but those projections cover a four-year span – from 2009 to 2012. And as it stands now, the program is way behind schedule. As of the end of November, only 31,382 at-risk homeowners had been given permanent loan restructurings.

Credit Suisse called the performance statistics of the administration’s Home Affordable Modification Program (HAMP) “quite disappointing” but noted that increased government focus on raising conversion rates could lead to an improvement in short-term results. From a longer perspective, one can argue a case of diminishing returns, meaning that borrowers who could qualify would have already done so, the bank said.

“We anticipate multiple rounds of government attempts to achieve foreclosure prevention for those who fall through trial mods by lowering the bar or directing them towards alternative foreclosure prevention programs” such as the administration’s short sale and deed-in-lieu initiatives, the researchers said.

Improving home prices and a narrowing demand/supply gap are pointing towards early signs of stabilization in the housing market, according to the report, with recovery supported by a decline in foreclosure sales, record high affordability levels, and the homebuyer tax credit.

While delinquencies continue to rise, foreclosures have slowed due to the government’s foreclosure prevention initiatives. At this point, the housing market has achieved a very tentative sense of balance that could swing to either a modest upside or a significant downside, the report noted.

“Success in preventing a sizable proportion of delinquent properties from foreclosure will be key for a housing recovery in 2010,” the report emphasized.

Credit Suisse estimates that roughly 4.2 million homes will reach the brink of foreclosure next year. All but 1 million of these must be averted to stabilize the residential sector, the bank concluded.

Other risks to the housing market, according to Credit Suisse analysts, include a blowout in mortgage rates and an abrupt decline in purchase activity when the homebuyer tax credit expires in April 2010.

The government, though, holds these risks in its hands, the researchers said, and can alleviate any downside by prolonging the Federal Reserve’s mortgage-backed securities (MBS) purchase plan – which has succeeded in bringing mortgage rates down to record-lows and is scheduled to wind down by next March – or by extending the federal tax break for home purchases.

Credit Suisse also laid out a plan for reforming Fannie Mae and Freddie Mac in its report. It is proposing a “good bank/bad bank” split of the GSEs, with the good side retaining healthy guarantees and portfolio assets, and the bad side holding the enterprises’ existing credit book and portfolio of problem loans and securities.

 

 

By: Carrie Bay   http://www.dsnews.com/articles/stability-in-home-prices-hinges-on-foreclosure-prevention-report-2009-12-24