Bangkok--3 Jul--Standard & Poor's
The global housing industry and mortgage markets continue to decline in parallel as they have since mid-2007, according to a Standard & Poor's Ratings Services report published today. Overall, we expect higher levels of mortgage default in 2009 than in 2008 and 2007 due to economic reasons such as job losses. In addition, while most rated financial institutions have taken losses in subprime and riskier Alt-A mortgages, we still expect more losses in the prime jumbo market due to economic reasons and seepage into the traditional prime conforming market. We also believe that respective governments' fiscal planning and the success of government programs in rekindling secondary markets will be crucial to bringing liquidity, stability, and recovery to the global housing and mortgage markets.
"We have observed that the majority of our rated issuers have been affected by similar dynamics and trends in their respective markets," said Standard & Poor's credit analyst Daniel Teclaw in the report, "The Downside Of Global Diversification: Housing Industries And Mortgage Markets Continue To Decline In Parallel." "Timing of cycles has become closer with intertwining of economies and financial markets, reducing, in our view, diversification benefits and opportunities for investors. Of course, a likely drawback of a closely intertwined global economy is that the closer the parts are correlated, the fewer the alternatives for investor sanctuary from weakening areas."
In the U.S. market, we have observed that housing starts and sales seem to be bottoming out. Nationally, home prices are back below their historical average relative to income, with the average single-family house estimated at 2.4x average household income in second-quarter 2009, compared with an average ratio of 2.6x from 1960 through 2000. However, we believe that the need to get rid of excess inventory will probably drive prices even lower. We estimate the S&P/Case-Shiller Home Price Index (HPI) will drop another 10% by early 2010, leaving it down to about 40% from its July 2006 peak.
Subprime, Alt-A, and home equity lines of credit, in our view, have experienced poor asset performance since mid-2007. Sequentially, we believe weak economic conditions and asset depreciation have caused the performance of prime jumbo mortgages and even conforming conventional mortgages to deteriorate. As the economy worsens, we believe declining HPI and economic deterioration are driving losses and severities higher. We believe the rate of deterioration should subside by fourth-quarter 2009 as recently lifted moratoriums on loans accelerate modification attempts, redefaults, and new foreclosures in second- and third-quarter 2009. We expect 2010 to be stable or to see low to moderate growth that can stave off further losses.
We continue to expect mortgage modification and servicer indemnification to stem the tide of homes coming onto the market. To the extent fewer homes come onto the market and sales occur (whether short or deeds-in-lieu of foreclosure), valuations can stabilize and entice sidelined liquidity back into the purchase market, whether for investment or owner occupation.
Financial institutions active in European mortgage markets are facing a double whammy. On the one hand, we see weakening asset-quality indicators starting to become apparent in negative economic growth, rising unemployment, and widespread house price pressures. On the other hand, funding pressures remain acute and earnings prospects appear weak despite some offset from better mortgage repricing. In our opinion, among the major European markets, rating pressures remain most likely for financial institutions active in the U.K. and Spanish mortgage markets. The report also examines the mortgage insurance and mortgage servicing arenas, as well as our European structured group, and our Latin American office.
In general, we continue to expect economies to stabilize in late 2009 with some slow expansion in 2010. However, we expect timing across regions to be staggered, and the severity of the current housing and economic crises may affect how robust any recovery is.
The report is available to RatingsDirect subscribers at www.ratingsdirect.com. If you are not a RatingsDirect subscriber, you may purchase a copy of the report by calling (1) 212-438-9823 or sending an e-mail to [email protected]. Ratings information can also be found on Standard & Poor's public Web site at www.standardandpoors.com; under Ratings in the left navigation bar, select Find a Rating. Members of the media may request a copy of this report by contacting the media representative provided.
Media Contact:
Jeff Sexton, New York, (1) 212-438-3448 [email protected]
Analyst Contacts:
Daniel E Teclaw, New York (1) 212-438-8716
Nigel Greenwood, London (44) 20-7176-7211
Beth Ann Bovino, New York (1) 212-438-1652
Kate Livesey, London (44) 20-7176-3545
Claudia Sanchez, Mexico City (52) 55-5081-4418
James Brender, New York (1) 212-438-3128