By Yali N’Diaye

WASHINGTON (MNI) – By their own different standards of normalcy,
top economists at U.S. housing and mortgage organizations see the U.S.
housing market returning to normal as early as 2013 with the possibility
that some “deeply underwater” homeowners may not resurface until 2018.

However, 2014-2015 emerges as the most likely timeframe according
to answers from chief economists and officials at the National
Association of Realtors, the National Association of Home Builders, the
Mortgage Bankers Association, and Ginnie Mae surveyed by Market News
International.

The criteria for a return to normal vary from one expert to the
other, with the emphasis on economic indicators such as home price
stabilization, on financial indicators such as lending standards or even
on regulatory aspects.

Ginnie Mae President Theodore Tozer told MNI in an exclusive
interview Wednesday that one key factor is “to get to the shadow
inventory issue.”

Another criteria for a return to a normal market, he said, is to
end legal and regulatory uncertainty.

“I think those two are equally important” to bring the housing
market back on its feet, he said, which could take a couple of years,
bringing us to about 2014.

The normal state of the housing market, Tozer said, is when
borrowers have a “reasonable” credit, a “reasonable” downpayment of 5%
to 10%, and can obtain home financing “at reasonable rates” and “not
being treated as kind of a high risk type borrower.”

Normalcy will also be achieved when home prices are stabilizing or
“having a slight appreciation” of 1% to 2%, Tozer said.

On the first point of reasonable credit access, Tozer pointed out
that currently, borrowers need to show Fico scores — which are used to
determine credit offers and interest rates on loans — in the high 600
or low 700, and “probably” a 20% downpayment, to be able to get loans
“outside of the FHA or VA world.”

Ginnie Mae guarantees the principal and interest payments on
mortgage-backed securities (MBS) issued by program participants. The
securities are collateralized by the cash flows from loans insured or
guaranteed by the Federal Housing Administration (FHA), Department of
Veterans Affairs Home Loan Program for Veterans (VA), Office of Public
and Indian Housing (PIH), and the U.S. Department of Agriculture Rural
Development (RD).

“Normalcy should mean that the market is not being dominated by the
government programs,” Tozer said.

Outside the FHA programs, to get the lowest interest rate, he said,
borrowers’ Fico scores have to be somewhere in the north of 700 with a
20% to 25% downpayment.

“That’s a reason so much of the business is flowing down to FHA and
VA,” he said.

Earlier Wednesday, the Mortgage Bankers Association reported in its
weekly survey of mortgage applications that the average contract
interest rate for 30-year fixed-rate mortgages with conforming loan
balances ($417,500 or less) decreased to 4.05%, “the lowest rate in the
history of the survey, from 4.09%, with points increasing to 0.44 from
0.41 (including the origination fee) for 80% loan-to-value (LTV) ratio
loans.”

To reach normalcy, home prices also have to stabilize, and this
will depend on how long it will take to improve the shadow inventory,
Tozer said, referring to homes headed towards foreclosure or foreclosed
and not yet for sale, .

“Hopefully,” this issue will be resolved “in the next couple
years,” he said, given the foreclosure timelines.

Tozer also underlined that the regulatory environment will also be
key.

He stressed that lenders feel like “they are constantly under fire”
for past loans. As a result, they are reluctant to make new loans for
fear that if a loan goes delinquent, the government will try to find a
reason the lender “did something wrong.”

So lenders are only extending credit “to people they feel
comfortable are not going to miss a payment, which is unrealistic
because things happen,” Tozer said, as people do lose their jobs or or
face other challenges so that “some small percentage” will go
delinquent.

Overall, he concluded, returning to normal requires the legal
environment “to become a little less hostile to lenders.”

In addition to a less uncertain regulatory environment and less
stringent lending standards, the housing market will be normal when
prices stabilize, Tozer said.

On that front, “Employment has started to stabilize based on last
month’s employment numbers,” he said. “I think that’s good as far as
home price stabilization.”

And in fact, “Employment will be the biggest driver” to return to
normalcy, NAHB Chief Economist David Crowe told MNI.

Referring to housing starts, he defined his own normal as a housing
market “producing 1.7 million housing units a year, that’s the
underlying demographic demand.”

“And I think that’s at least 2014 and maybe even 2015,” Crowe said.

NAHB’s definition of normal is similar to Fannie Mae’s — hence the
similar expectations for when the housing market will stabilize.

Fannie Mae Chief Economist Doug Duncan recently said “normal” is
when construction “returns to the level that would be required by
demographic growth to see additions to housing stock.”

“Our view is that happens probably in 2015 or so,” he said.

Standard & Poor’ said Tuesday in a report that “Despite the rough
road behind us, we believe single-family housing starts and sales have
likely troughed, and most rated builders are gaining market
share–albeit of a much smaller pie.”

NAR Chief Economist Lawrence Yun told MNI that “A return to normal
is when an average person is able to buy a home and an average person is
able to sell without too much stress.”

This definition means that underwriting standards will have to
return to “normal,” which could occur by 2013, consistent with the home
price stabilization he expects.

“However, for those deeply underwater homeowners, it may be 2018 or
longer before resurfacing above water,” he warned. “At the same time,
homebuyers of recent years who picked up bargain homes have no stress
and view the market conditions already as normal.”

Yun also cited the need for the months-supply of inventory to
decline to “historic average without the high rate of cancellation
brought by appraisal and short-sale issues” before the housing market
returns to normal.

The key driver for this to happen, Yun said, is a “Natural rise in
demand from household formation, affordability conditions, job creation
and normal underwriting” converging to shrink the inventory of homes
available for sale. “The only holdout to the natural recovery is the
underwriting standards.”

MBA Chief Economist Jay Brinkmann pointed out that when the housing
market returns to normal depends on local conditions.

“This will differ by locale,” he told MNI. “Some places are already
seeing more normal conditions and some will not return to normalcy for
years.”

He added, “The housing market will return to a more normal state
when there is a better balance between sales of distressed and
non-distressed properties, when there is less dependence on FHA, Fannie
Mae and Freddie Mac, and when unemployment drops closer pre-recession
levels.”

** Market News International Washington Bureau: 202-371-2121 **

[TOPICS: M$$AG$,M$U$$$,MAUDS$]